HL Deb 22 March 2004 vol 659 cc197-264GC

(Third Day)

Monday, 22 March 2004.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Baroness Ramsay of Cartvale) in the Chair.]

Clause 9 [Statement in directors' report as to information disclosed to auditors]:

Lord Hodgson of Astley Abbotts moved Amendment No. 63: Page 12, line 24, at end insert— (4) It is a defence for a person charged with an offence under section 234(7) for a director to show—

  1. (a) that he had no actual knowledge of the information in question that ought to have been disclosed to the company's auditors;
  2. (b) that proper arrangements had been established by resolution of the Board of Directors, allocating responsibility (whether in a specific or generic manner) to one or more directors other than himself for ascertaining the facts or circumstances to which the information in question related; and
  3. (c) that he had relied, and it was reasonable in all the circumstances for him to rely, on that other director or directors to ascertain the facts or circumstances in question and to disclose them to the Board of Directors.""

The noble Lord said: We are still dealing with proposed new Section 234ZA, entitled: Information to have been disclosed to auditors before directors' report approved". This follows on from the debate we had towards the end of the previous sitting of the Grand Committee in regard to materiality, reasonable inquiry and the concept of "ought to know".

The amendment seeks to add an extra safeguard for directors with a view to balancing better their greatly increased responsibilities and liabilities. It also attempts to address the relative responsibilities of those directors who work in the company in question and those who do not—that is, in modern business parlance, the difference between executive and non-executive directors.

It is appreciated that under present company law all directors are equally responsible for the company and therefore are equally liable but, in the real world, a non-executive director simply cannot be as well informed about the operations of the company as an executive director. Indeed, there is a real argument that he should not be. One of his important roles is to stand back from the day-to-day operations of the company and provide advice on strategic developments. Another important role is to provide cross-fertilisation between company boards to ensure that best practice is spread and new ideas and approaches tested out.

Let me give a practical example. One of my non-executive directorships, which I have from time to time declared, is on the board of one of the United Kingdom's largest regional brewers. We operate 1,500 pubs, 1,000 of which are tenanted and 500 managed. We have many community pubs, but some are in densely populated inner-city areas and some are high street wine bars. We also have a brewing operation. I do not—I cannot—know the details of these operations to the extent that my executive directors can and do. My role is to help the company with the challenges of strategic development, as I did, for example, last year with the new Licensing Act and do now with issues raised by increasing public concern about passive smoking. But when the annual report is now approved, and when in future this new statement is added, I shall have to rely on my co-directors, particularly my executive directors.

The report we have recently published runs to 64 pages; each year it gets longer and goes into greater detail. I shall refer further to this when we come to Amendment No. 83, tabled by the noble Lord, Lord Sharman, but let me give a simple example. As I said, we operate 1,500 pubs. In our environmental policy we are now required to report about cooking oil. We have stated: Used cooking oil is collected by waste contractors who dispose of it in the most responsible manner commercially available". That is fair enough and I have no objection to that being stated. But I increasingly have to be aware of this kind of detailed information. I have no idea whether or not the Dog and Duck in Much-Binding-in-the-Marsh deals with the cooking oil requirements; I have to rely on my fellow executive directors to tell me that there is a proper system and that it is being enforced. So whether or not the law at present recognises it, there is inevitably a difference between the executive and non-executive director.

The amendment seeks to address this increasingly important issue. We have been helped in this by David Kershaw, a partner in the City law firm Ashurst. The details of the amendment allow that it will be a defence for a director charged with an offence under Section 234(7) to show that, first, he had no actual knowledge of the information in question that ought to be disclosed to the company's auditors; secondly, that proper arrangements had been established by resolution of the board of directors allocating responsibility, whether in a specific or generic manner, to one or more directors other than himself for ascertaining the facts or circumstances to which the information in question related; and, thirdly, that he had relied, and it was reasonable in all the circumstances for him to rely, on that other director or directors to ascertain the facts or circumstances in question and disclose them to the board of directors.

The amendment presents three distinct safeguards for the future. The first defence is that the director can prove that he was unaware of the information required by the auditor. The second is that he can prove that the responsibility for ascertaining particular facts had been allocated to another director. The third is that he had relied on the information provided by the director so allocated.

Boards of directors work on the basis of a delegation or division of responsibilities. It is not reasonable to expect every director to ask every question that needs to be asked. To some extent, each relies on the most appropriate in their midst to ask the relevant questions and report to the board. After all, that is the basis of the establishment of committees of the board, a prime example of which would be the audit committee. In several ways, the Bill increases the burden on directors, with their liability being increased under several clauses. Without the safeguards that we propose in the amendment, the role of a director—particularly a non-executive director—will seem increasingly undesirable. I beg to move.

Lord Sharman

I support the amendment. Since our previous sitting, I have thought long and hard about the clause. We are struggling very hard with the results of a piecemeal approach to reform of company law. The provision introduces a new criminal liability for directors—I dare say that civil liability will flow on the back of that—in an environment in which we have not adequately redefined the roles and responsibilities of directors, the functions of the board, and the relationships between the audit committee, the other committees of the board and the board as a whole. All those were written into law 50 years ago, but the practice and expectations of members of a board have moved on.

I am perplexed on how we shall resolve the matter without that wholesale reform. If we are to tackle it piece by piece, we have to build into the legislation as it stands some reasonable safeguards, and I regard the amendment as providing some.

Lord Wedderburn of Charlton

The noble Lord, Lord Sharman, might not give full credit to the Minister. At the end of our previous sitting, as I understood him, my noble friend guaranteed that, before the Bill reached the statute book, we would have a statement from the Government on the conclusions from their consultative document and what has happened since about the standard that they propose for directors overall. We may not have a Bill, but we will have made progress.

I had intended to speak to the amendment, but perhaps I misunderstood it altogether and must therefore adjust my remarks. I had thought that it was all part of the matter that we had discussed; namely, the business attempt to dilute what is proposed as the objective standard of care for directors, just as there is an objective standard for doctors, accountants and nurses. That is what is involved in the "ought to know" problem.

The noble Lord, Lord Hodgson, suggested that the amendment distinguished executive directors from non-executive directors, however. I do not find that in the amendment at all. It might lead to a certain difference in the application of standards to executive and non-executive directors, but it would do so rather strangely and not altogether consistently compared with the clause. The clause states that any director "ought to know" if a matter would be known by a reasonable person with, knowledge, skill and experience … carrying out the same functions as", he has on the board. That may allow for a different view of some non-executive and executive directors. Previously, we discussed in particular finance directors and people with that kind of specific function.

If the noble Lord says that he is not used to inquiring what goes on in the Duck and Drake—or whatever the name of the pub is—under the present clause, there may be circumstances when he should. I do not know the circumstances of the Duck and Drake; I am not sure that I visit his range of pubs. Perhaps I should.

Lord Hodgson of Astley Abbotts

You certainly should.

Lord Wedderburn of Charlton

I shall try to do so. The noble Lord is ignoring the fact that what I say is true. The Bill will adjust the standards of what people perhaps ought to inquire into on an objective basis. He may have to get used to slightly new ways.

But the amendment makes the position even worse; it is not of itself consistent. Paragraphs (a) and (c) in the amendment push towards a subjective test. The person on the board would be judged, first, on his actual knowledge and, secondly, on what it would be reasonable in all the circumstances to rely on in regard to, other directors … for ascertaining the facts or circumstances", and disclosing them to the board. Those are predominantly subjective tests.

Paragraph (b) in the amendment is an additional required test: paragraphs (a), (b) and (c) have the word "and" connecting them. The director would have to show, that proper arrangements had been established by resolution of the Board of Directors, allocating responsibility … to one or more directors … for ascertaining the facts". That is an objective test.

If a director cannot show that there are proper arrangements—whatever the court may think are proper arrangements—he could not come under the amendment. A non-executive or executive director or anyone else on the board may have voted against the arrangements. They may have been carried in the face of his intense opposition because he did not think that they were proper. Yet, under the amendment, in the eye of the court, if they are not objectively proper the clause would give such a director no comfort or assistance.

This is a very strange amendment, which shows the lengths to which some stables will go in running horses against the objective test. I urge the Government to stay with the test of what a reasonable person ought to know who carries out those types of functions—I stress "those types of functions"—on the board.

3.45 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)

I shall first cover the point made by the noble Lord, Lord Wedderburn, about what I said at the end of' the previous sitting. The noble Lord, Lord Sharman, asked me to answer his question about whether he could expect a statement on the plans for reform of directors' liabilities before the Bill was passed. I said yes.

We are talking about precisely that, not a statement about the duties of directors. We will simply make a statement after we have consulted on directors' liability about that consultation. I do not think that Members of the Committee should read anything more into my statement than what it actually said.

I have listened with interest to what has been said. The amendment seeks to address some of the concerns expressed by Members of the Committee when we debated previous amendments to Clause 9 last Wednesday. There was particular concern that one director might be required to take too great a responsibility for the failure by another director to disclose information to the auditors.

It therefore might be helpful if I outline what we are trying to achieve through the statement in the directors' report, to remove any misunderstanding.

The purpose of Clause 9 is to make each director think carefully about the disclosure of information to the auditor for the purposes of the audit. We can tackle that question without a wholesale reform of the duties of directors. It is not sufficient for a director to have to consider only information of which he or she is already aware, but we do not expect directors to pursue every possible avenue that could yield relevant information. A director should have to direct his or her mind to whether there is information that is relevant to the auditor's opinion that has not been disclosed and which that person thinks is incomplete or false.

We cannot give such glamorous examples as the noble Lord, Lord Hodgson, with his experience of pubs and breweries. My noble friend Lord Evans and I have a simpler example: that of the sales director of a publishing firm who sees in the accounts a figure for stocks of books which seems to that person unrealistic—perhaps because he knows that the stock consists of political memoirs and is therefore not saleable. He must consider whether he should examine those figures to make certain whether the information has been properly disclosed to the auditors or, on the other hand, is incomplete or false.

We believe that a director should have that responsibility. It is much clearer and more limited than the noble Lord, Lord Hodgson, fears. However, as we suggested last Wednesday, we will reflect carefully on what has been said about this clause and consider whether we need to introduce amendments to clarify the provisions. We are mindful of the need to produce balanced legislation that is fair to directors but which also protects shareholders. All the amendments to this clause tabled by the noble Lord, Lord Hodgson, would limit what directors would need to consider in making a statement. Although it is not our intention to impose unreasonable requirements on directors, we must not forget that the purpose of this clause is to facilitate the audit process, providing greater market reassurance to the benefit of shareholders and others. We must not lose sight of that.

I hope that I have made it clear that we will reflect carefully on the points made both last week and today. In the light of that, I hope that the noble Lord will feel able to withdraw his amendment.

Lord Wedderburn of Charlton

Perhaps I may press my noble friend on what he said in his clear opening remarks. Is it the case that, in the statement that the Government intend to make in the face of the consultation, he does not believe that we will get the Government's preliminary view in choosing between an objective test of the type in subsection (3) for directors generally and the business judgment rule?

Lord Sainsbury of Turville

My remark was carefully made. I said that it was a statement and noble Lords should not read into that anything more than that it is a statement. We will have to wait until the statement is made to find out what it says.

Lord Hodgson of Astley Abbotts

I am grateful to the Minister for his further reassurance that this clause will be reconsidered. His example of the sales director went to the heart of what I was driving at. The sales director is an executive and therefore would be expected to know. My problem is with non-executives who, perforce, are slightly more distanced. The noble Lord, Lord Sharman, partly underlined the issue of the difficulty that we all face in this area if we include this piece of the jigsaw but not the rest of the pieces that he outlined in his remarks.

The noble Lord, Lord Wedderburn, took me to task on several counts. However, I think that he now understands that he will not get the objective statement of government policy on directors' duties in time. He said that directors will have to get used to new ways. The reality is that boards of companies have, over the past five to 10 years, faced an unprecedented rate of change. The noble Lord may shake his head, but he need only look at the quality, length and detail of annual reports and how they have expanded to know that that is the case.

I was not suggesting that this clause would commend itself to the parliamentary draftsmen word for word—that would be asking far too much. When an amendment is even partially accepted, it always needs to be redrafted and given an imprimatur. However, I am grateful to the Minister for his reassurance on this point. Pending his further consideration and reflection, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 64 and 65 not moved.]

Clause 9 agreed to.

Clause 10 agreed to.

Clause 11 [Disclosure of tax information by Inland Revenue to facilitate application for declaration that accounts are defective]:

Lord Hodgson of Astley Abbotts moved Amendment No. 66: Page 13, line 10, after "disclosed" insert "at the request of, and

The noble Lord said: The Government will note that we have given notice of our intention to oppose the Question that Clause 11 stand part, which we wish to raise later. Although we are concerned with the overall implications of the clause, we wish to raise specific points within it, as can be seen in the group of amendments to which I shall now speak—Amendments Nos. 66, 67 and 68. Clause 11 provides for the disclosure of information by the Inland Revenue to a person authorised under Section 245C of the Companies Act 1985.

Amendment No. 66 concerns subsection (1) and requires that information disclosed by the Inland Revenue to the authorised person has been requested by the authorised person. The Bill appears not to specify whether a request from the authorised person is a pre-requisite to disclosure. The amendment will guarantee that information can be disclosed only if so requested.

Amendment No. 67 would delete lines 17 to 19—subsection (2) of new Section 245D. The subsection provides that information held by the Inland Revenue, may be disclosed despite any other restriction on the disclosure of information whether imposed by statute or otherwise". It appears that that would effectively override any claim to confidentiality of information as laid out in past Acts, bar the Data Protection Act, as specified in subsection (2)(b). Such an exceptionally broad base for disclosure combined with meagre safeguards could have the undesirable consequence of reducing taxpayers' readiness to be frank in their dealings with the Inland Revenue.

I notice that the rather draconian wording of subsection 2(a) in new Section 245D is similar to that found in Section 19, entitled "Disclosure of information held by revenue departments", of the Anti-terrorism, Crime and Security Act 2001. Section 19(2) states: No obligation of secrecy imposed by statute or otherwise prevents the disclosure … of information". The Anti-terrorism, Crime and Security Act was created to combat terrorism, which is one thing; but, according to the Government, this Bill has been introduced to help restore investor confidence in companies and financial markets following recent major corporate failings, many of which have been overseas. Although I accept that the former case—that is to say, anti-terrorism, crime and security—permits extreme measures, this is a company law Bill and should not follow such a precedent; nor is it appropriate that it should do so.

Amendment No. 68 adds to the Bill the requirement that the Inland Revenue may disclose information only, if that information was lawfully obtained by the Inland Revenue for tax purposes". Without such a safeguard, any information could be routed through the Inland Revenue for onward disclosure. For that reason, and in the interests of maintaining public confidence, the amendment should be included. I beg to move.

Lord Sainsbury of Turville

This group of amendments has a common theme in seeking to constrain and limit the way in which the Inland Revenue can pass information through the information gateway created by Clause 11.

A number of points and questions have been raised on the amendments in this group. It would be most helpful if I looked at each amendment in turn, starting with Amendment No. 67, which deletes subsection (2)(a) of new Section 245D of the 1985 Act, and without which the clause would not operate. As such, we oppose the amendment, but I acknowledge that the purpose behind it is not to wreck the whole clause but to explore why we need such a provision.

The subsection in question permits a disclosure through this gateway, despite any statutory or other limitations on disclosure of information by the Revenue. It has to do this, for that is how gateways work. The starting point is that the Revenue is not permitted to disclose its information. Legislative gateways may then be opened that permit Inland Revenue information to be disclosed for particular purposes and to particular people or bodies. This is one such gateway.

I imagine that when we come to debate the clause—I note that the noble Lord has indicated that he wishes to oppose its inclusion in the Bill—we will discuss the principle and use of such gateways more generally. For the purposes of this amendment, I hope that it is sufficient for me to say that without a subsection that states that the new gateway is not overridden by existing barriers to disclosure, this would be a gateway whose gate would remain firmly locked.

I listened carefully to the noble Lord's points, because it has not been entirely clear to me what Amendment No. 68 was seeking to do. The Inland Revenue obtains information in the course of carrying out its statutory functions, the most pertinent one here being the assessment and collection of corporation tax. This may include using statutory information powers or gateways provisions. Perhaps the noble Lord was concerned about the prospects of wrongfully obtained information getting into the hands of the FRRP without the company's knowledge, where it might then be further misused, possibly in some sort of witch hunt through a company's accounts. I can reassure the House that that will not happen. The Revenue's function remains unchanged.

I remind the noble Lord of the reassurance given by the Inland Revenue to its Large Business Forum. The Revenue will only be dealing with information that has come to it in the course of normal business. The reassurance goes further—we expect that information to be shared with the company before it is disclosed to the FRRP. The company would have ample opportunity to clarify its position and correct any misunderstandings rather than being a passive bystander as information passes from the Inland Revenue to the FRRP. If he Revenue ever considered that there was doubt about the lawfulness under which it was holding certain information, it would not disclose this information to the FRRP until this question had been resolved. I hope that this gives the noble Lord the assurance he was seeking.

Amendment No. 66 inserts a requirement that information is disclosed to the FRRP at its request. We do not think that this is appropriate. We would not wish to see the FRRP demanding information from the Revenue. This is a permissive gateway in that it allows the Revenue, if it so chooses, to pass on any information it may come across that it feels could be of use to the person who is authorised to review company accounts against the requirements of the Companies Act—that is, the FRRP. It is for the FRRP to decide how to act on this information. We do not want to see the FRRP demanding information from the Revenue. Furthermore, under this amendment, a situation could easily arise whereby the Revenue uncovered a potential departure from the legal requirements, but was unable to share the information with the FRRP. In short, under this amendment, where the Revenue identified information concerning the compliance of company accounts, it would be powerless to alert the body responsible for the enforcement of the accounts, the FRRP.

I hope that I have offered the noble Lord the reassurance he was seeking, and that he will withdraw his amendment.

4 p.m.

Lord Hodgson of Astley Abbotts

I am grateful to the Minister. I listened very carefully to what he said. The "no witch hunt" assurance is important. There has been some concern that this is another lever that the Inland Revenue could use. I have come across cases in my professional life where businessmen—I am not suggesting that they are angels—have sought to take legitimate advantage of the tax laws of this country. The Inland Revenue has disapproved of the way in which they have done so, and those cases have gone to court and have been found in favour of the taxpayer. When the taxpayer wins the battle he probably loses the war, since his affairs are given such a going over for the next four or five years that he probably wishes that he had not started in the first place. The Inland Revenue is legitimately entitled to do it, but you can get in that way. It is important that this should not be another lever by which pressure can be applied to companies. I am grateful to the Minister for that assurance.

I understand about the "at the request of" issue, and the fact that if the Inland Revenue identifies something that it wants, it will pass it on. I accept the force of that argument. It is a question of being absolutely certain about "no witch hunt". Once there becomes this easy passage of information, things slide across in a way that was not originally envisaged. I will read carefully what the Minister said about, "at the request of", but I see the points that he was making. For the time being, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 67 and 68 not moved.]

Lord Hodgson of Astley Abbotts moved Amendment No. 69: Page 13, line 24, leave out "for the purpose of facilitating" and insert "to enable

The noble Lord said: We are staying with Clause 11. Amendments Nos. 69 and 70 are on the issue that we have just discussed. Amendment No. 69 tightens up the wording of subsection (3) of new Section 245D. The Bill reads: For the purposes of subsection (1), a disclosure is made for a permitted purpose if it is made for the purpose of facilitating—(a) the taking of steps … or (b) a determination by the authorised person". Replacing the words "for the purpose of facilitating" with the words "to enable" gives a degree of certainty to the subsection. As I argued in the previous group of amendments, the existing wording tends to suggest the possibility of fishing expeditions. It also helps to maintain the Queen's English by removing from the Bill one of three uses of the word "purpose" in that one sentence. The amendment would ensure that the Inland Revenue must focus on the real justification for its actions in each case of disclosure, rather than just falling back on the more comfortable word "facilitating".

Amendment No. 70 seeks to include an addition to the same subsection, reading: For the purpose of subsection (1) a person is only permitted if the authorised person has good reason to believe that there are grounds for an application under section 245B of this Act or Article 253B of the Companies (Northern Ireland) Order 1986". Again, that is a safeguard to ensure that the authorised person has good reason to authorise disclosure. Nothing else in the Bill ensures that to be the case. While it may be very well to claim that disclosure will never be given without good cause, for the sake of good administration such things ought to be spelt out in the Bill. I beg to move.

Lord Sainsbury of Turville

I shall speak to Amendments Nos. 69 and 70. As with the previous group of amendments, they are concerned with the way in which the Inland Revenue can pass information through the information gateway under Clause 11.

The words in Amendment No. 69 "for the purpose of facilitating" were carefully chosen. As the noble Lord said, the words that we have put in the clause have a wider meaning than the words "to enable", proposed by the amendment. In order to explain why we oppose this amendment, I will say a few words about how the gateway will operate. I hope that by doing so I will explain why "to enable" would be unnecessarily restrictive.

I stress that we do not expect information provided by the Inland Revenue to lead to the FRRP taking action against a company without further investigation. Inland Revenue information is likely only to act as a catalyst for the FRRP to initiate its own investigation. It is as a result of that investigation that the FRRP would decide whether to make an application for an order to prepare revised accounts. It follows that we want the Revenue to be able to pass information over to the FRRP that may help it to decide whether any corrective action is needed; in other words, "for the purpose of facilitating such action".

While this may seem a purely semantic point, if the higher test of "enabling" the FRRP were put in place of "facilitating", it would make a real difference in practice to the way in which the gateway would have to operate. In order to establish whether certain information would enable the FRRP to take action—as opposed to facilitating action—the Revenue itself would have to carry out some sort of preliminary review of the data in question. It would have to place itself in the position of the FRRP to determine whether the information was of such a key nature, bearing in mind other information that the FRRP might already have, that it could be said to enable the action in question.

The noble Lord may say that of course the Revenue will need to carry out such a review of the data—indeed, how else will it decide whether it has information that ought to be shared with the FRRP? I agree that the Revenue will need to consider which bits of information, if any, should be passed over to the FRRP. Our objective here is to enable the Revenue to pass on information that may help the FRRP to fulfil its function—the reviewing of company accounts against the requirements of the Companies Act—if it should come across such information in its day-to-day work. The clause as drafted would enable it to do that in a straightforward way.

Under the amendment, the Revenue would have to do more than that. It would have to stand back and analyse what it had discovered, using the very expertise that rests with the FRRP, in order to ascertain whether the information would or would not enable the FRRP to take action. It would also have to consider whether it was information already held by the FRRP, or otherwise available to it. That is an impractical, time-consuming and perhaps impossible task, yet it would have to satisfy itself on all these counts, for if it was not able to do so, it would be a criminal offence for the Revenue to pass the information over.

Amendment No. 70 inserts a requirement for the Revenue in effect to pre-clear any disclosure that is proposed to be made to the FRRP, by satisfying itself that the FRRP has good reason to believe that there are grounds for it to make an application to court to require a re-statement of the accounts under Section 245B of the Act. Under this amendment, disclosure would be permitted only where the authorised person already had a good reason to consider that accounts were non-compliant, creating a confusing chicken and egg situation. If the authorised person already had a good reason, the need for information to be disclosed would be reduced. This amendment would place the Revenue in the position of having to judge what information the authorised person had and what conclusions that person could draw from it with regard to making an application to court before the Revenue could make any disclosure under the gateway.

As I have said already, the gateway allows the Revenue, if it so chooses, to pass on any information that it may come across that it feels may be of use to the person who is authorised to review company accounts against the requirements of the Companies Act. However, the gateway does not require the Revenue to pass any information to the FRRP. Of course, the Revenue and FRRP will work together ahead of using this gateway to identify the types of information likely to be of most use in helping the FRRP to fulfil its functions. That is a practical way of supporting the intention of the clause without swamping the FRRP. That is a far cry from the FRRP specifying particular companies to the Revenue and asking for data on those companies, as a kind of fishing expedition. That is not how the gateway would operate in practice. The Revenue's statutory functions do not include acting as an investigative agent for the FRRP. The gateway is there so that, should the Revenue come across potentially valuable information in its day-to-day work of looking at company accounts, it will not be prevented from sharing this with the FRRP.

However, the FRRP cannot chase after specific information that is held by the Revenue. It cannot look at what the Revenue is holding and decide what it might find useful. The FR RP will be the passive recipient of any information that the Revenue chooses to pass on. Under subsection (1)(b), the disclosure must be made by the commissioners of the Inland Revenue or be authorised by them, and we expect the number of referrals to be low. I hope that I have offered the noble Lord the reassurance that he was seeking and that he will withdraw the amendment.

Lord Hodgson of Astley Abbotts

The Minister's last few sentences about being a "passive recipient" were reassuring. He said that the amendment would make a difference to the way in which the gateway operated—it was intended to do that. I wanted the Inland Revenue to have to stand back, as his speaking note said. That was the idea—that it should stand back. I accept the point about whether the FRRP knew the information already. The Minister gave a long, detailed answer to that, which I will read and reflect on. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 70 not moved.]

On Question, Whether Clause 11 shall stand part of the Bill?

Lord Hodgson of Astley Abbotts

Under existing legislative provisions, the gateways for the provision of information by the Inland Revenue relating to taxpayers' affairs are strictly limited. As a general rule, the Inland Revenue has a strict legal obligation, as the Minister has just been telling us, to maintain the confidentiality of the information that it holds. A breach of that confidentiality by a Revenue officer is a criminal offence. There are good reasons of principle in favour of upholding that duty of confidentiality. A taxpayer is much more likely to be candid in providing information to the Revenue if he is assured that that information will be treated in confidence. It must be in the public interest that the Revenue should be assisted in the carrying out of its functions by the provision of full and frank information from taxpayers.

Statutory provision for the disclosure of data on taxpayers held by the Revenue already exists, as the Minister pointed out, but the circumstances are strictly circumscribed. The Inland Revenue does not make public a list of its statutory gateways. The section of the Inland Revenue manual listing them is stated on the website to be, withheld under the code of practice on access to Government information". That is a helpful statement. It does not say on what basis the list of gateways qualifies as confidential information so as to render it exempt from the disclosure obligations created by the code.

To discover more detail about these gateways, I tabled a Written Question, which was answered on 28 January. The Question was about: Under what circumstances the Inland Revenue can lawfully pass on information which they have received in the course of their duties". The Answer, even by Sir Humphrey's standards, was anodyne, stating: The position under successive governments has been that the law on taxpayer confidentiality only allows the Inland Revenue to pass on information outside the department if it has the individual's consent or the disclosure is otherwise permitted by law".—[Official Report, 28/1/04; col. WA 50.] That took us hack to where we started from, so I subsequently tabled a series of hopefully more probing Questions. I asked about: On what grounds decisions are taken to transfer personal … data held by the Inland Revenue to other government departments". I asked about: On what statutory basis transfer of personal … data takes place from the Inland Revenue to other government departments; and how many such transfers take place each year". I asked: What kinds of personal … data held by the Inland Revenue"— whether on computer or manually— are transferred to other government departments". I asked: What records are kept of transfers of personal … data", from the Inland Revenue, to other government departments; and whether the Data Protection Registrar has access to the relevant records". The further responses were slightly more helpful, stating: The Inland Revenue's statutory duty of confidentiality is in Section 182 of the Finance Act 1989. This prevents it disclosing any information to third parties. There are exceptions in Sections 182(5) and (6) of the Finance Act 1989, which allow disclosure in the following circumstances: when a customer has consented, or for the purposes of the department's duties, or if authorised by the board or certain other authorities, or for the purposes of a prosecution in relation to Inland Revenue, or following a court order binding on the Crown, or in response to a witness summons or subpoena served in legal proceedings, or when the department's legal duty to maintain confidentiality is specifically overridden by statute i.e. information gateways". The noble Lord, Lord McIntosh of Haringey, answered: The Inland Revenue does not keep central records of the number of disclosures that it makes".—[Official Report, 12/2/04; cols. WA 185–86.] The gateways for Inland Revenue disclosure were listed in a Written Answer given in the other place on 20 February 1990. There were then about 14 grounds for disclosure, which are contained in several Acts. At least some of these 14 or so gateways have subsequently been altered by legislation. Recent legislation creating new gateways has included the Tax Credits Act 1999, the Anti-terrorism, Crime and Security Act 2001, and the Proceeds of Crime Act 2002. However, as regards company law, the principle of Revenue confidentiality has to date escaped unscathed by these incursions. It is one thing to erode the principle of Inland Revenue confidentiality in pursuance of serious crime, but another thing to do so in supporting auditing standards. Nothing in any consultation paper so far that I can see, and nothing in the Explanatory Notes accompanying the Bill, explains why it is thought necessary to encroach on that principle now. Rather than undermining this long-standing principle of confidentiality. the Government should initiate a proper consultation and review of Inland Revenue policy on this matter. In the mean time, Clause 11 should be removed.

4.15 p.m.

Lord Sainsbury of Turville

Clause 11 allows information to be passed from the Inland Revenue to the person authorised under Section 245C of the Companies Act 1985 to review accounts against the requirements of that Act. This person is the Financial Reporting Review Panel. Opening this information gateway follows on from a recommendation by the Co-ordinating Group on Audit and Accounting Issues. The view of that group, and the Government, is that there may be occasions when the Revenue, in the course of its normal review work, uncovers potentially important information which had particular relevance to a company's accounts which could, and should, be made available to the FRRP.

In the course of its business, the Revenue already considers whether accounts show a true and fair view in accordance with accountancy principles. At present, the Revenue could uncover some potentially significant departures from the legal or accounting requirements but, in the absence of a legal gateway, be unable to share the information with the FRRP—the body responsible for enforcing such requirements in statutory accounts.

In summary, therefore, this clause ensures that in future, if the Inland Revenue identifies information that raises a question about the compliance of company accounts with the requirements of the Act, it will be able to disclose that information to the FRRP, for its consideration and, as appropriate, investigation.

In practice, we expect the number of referrals to be low. None the less, we believe that this is an important measure in providing market reassurance about financial reporting. It also brings an important element of cost-effectiveness to the overall package of "post-Enron" measures that we are taking forward.

We have heard concerns raised about the whole principle of confidential Revenue information being passed on and used for other purposes. Of course we understand those concerns. It is a well understood principle that any information the Inland Revenue holds about its customers in general and company accounts in particular is confidential. The Revenue is governed by a strict legal duty to maintain the confidentiality of its customers' information. Any unauthorised disclosure of Revenue information in respect of an identifiable person by a Revenue official is a criminal offence, punishable by imprisonment and/ or a fine.

However, there are, of course, certain limited circumstances in which disclosure is permitted. The noble Lord, Lord Hodgson, was extremely concerned about these gateways and the secrecy attending them. They are all well known because they are in the legislation. A number of gateways already exist to address exactly these sorts of issues, such as those from the Revenue to the Financial Services Authority, Customs and Excise and the Home Office. I do not think that this gateway is totally out of keeping with the others. I cannot see why this one should be dealt with in the context of a major consultation on the overall issue of Inland Revenue gateways. This clause creates a new gateway and, like other gateways, it is subject to strict restrictions on the use to which such information can be put and on any further disclosure of the information.

In particular, I should like to draw attention to the fact that, under proposed new Section 245E(1), the information may be used by the FRRP only in order to establish whether there are grounds for an application to the court with regard to defective accounts, and in any proceedings on such an application. Under subsection (2), the information may not be passed to anyone else, other than the person to whom it relates, or in connection with court proceedings. Subsection (3) makes it a criminal offence to breach these restrictions on use and disclosure.

I have listened carefully to the noble Lord's concerns about the use of information gateways. I sympathise with his concerns about the use of confidential information. However, he will understand that a balance has to be struck between protecting companies' information and protecting the interests of the public as a whole. In my view, the public good is served by opening this gateway.

Of course I agree that confidential information should not be allowed to be abused, misused or passed willy-nilly around various regulatory bodies at the whim of officials. Parliament and the business community has every right to seek reassurances that this will not be the case. But, equally, we must remember the powerful public good objective behind this policy.

The noble Lord, Lord Hodgson, appears to have forgotten that the purpose of the Bill is to deal with accounting situations, particularly where scandals are involved, and to ensure that they can be more effectively dealt with. Accounting scandals can and do happen. When they happen, they can cause enormous financial and personal misery which, as in the case of Enron, can reverberate around the world. We must take action against such scandals occurring and facilitate their early detection.

The end objective must be to have an early warning system in place to detect potential accounting problems in the accounts of UK companies. The Revenue is one potential source of such a warning. We believe that it would be wrong to ignore the opportunity to revise the current law, under which Revenue officials are unable to notify the FRRP of any worrying signs they detect in regard to company accounts.

We cannot know, of course, whether or not the Revenue will come across the next Enron in the course of its work. It is equally possible—in fact, more likely—that such early warning would come from the auditors or from the FRRP itself under its proactive regime. But it is certainly a possibility that the Revenue could spot that something was amiss ahead of anyone else, or that others had not spotted, and we do not want to find ourselves locking the stable door after the horse has bolted.

I can well imagine the furore if, in the inquest over this hypothetical UK version of Enron, it transpired that the Revenue had suspected something was wrong with the accounts all along but had been unable to tell the body tasked with correcting those accounts. There would undoubtedly be a great clamouring for a gateway as a result. Our argument is simple: prevention is better than cure and we should create the gateway now.

I hope that I have explained to the Committee's satisfaction that this is a strictly controlled gateway with all the necessary protections against abuse and that the clause should stand part of the Bill.

Lord Hodgson of Astley Abbotts

Obviously, all of us, on all sides of the Committee, are against scandals. That is motherhood and apple pie. We do not want scandals. The question is whether the breaching of Inland Revenue confidentiality in this companies Bill will justify the results.

The Minister was very careful in his response to make clear that there would not be a great deal of information passed and that it was quite unlikely that the Inland Revenue would be able to pick up such scandals in time. His case rested on the basis that if there was a scandal and it was found that the Inland Revenue had known about it, there would be an outcry. I think that is a thin argument for making such a significant change and introducing a new gateway. If that were to be the case, it seems to me that that is not a very likely outcome.

The Enron scandal grew over a period of time but the Internal Revenue Service of the United States had no knowledge. It seems that these kinds of major frauds are usually extremely well concealed. It seems that we are giving the Inland Revenue powers or duties to breach confidentiality but we will not get much bang for our buck. However, we have had a good thrash through this issue and we will leave it there for the time being.

Clause 11 agreed to.

Clause 12 [Power of person authorised to require documents, information and explanations]:

Lord Sharman moved Amendment No. 71: Page 15, line 23, leave out from "where" to end of line 24 and insert "a person who is authorised under section 245C (other persons authorised to apply to court) of this Act reasonably believes there is a question as to

The noble Lord said: We now come to the powers of the authorised person—in this case the FRRP—to require documents, information and explanations, and the ability of that person to apply to the court for an order in that regard.

The amendment relates to the issue I raised at Second Reading in regard to what I described then as a test of reasonableness. As drafted, the clause refers to whether, there is, or may be, a question whether the annual accounts of a company comply". Once the Bill becomes law, it will open up the opportunity for anyone to write to the FRRP to draw its attention to any set of accounts, whatever the basis of their suspicions, inquiries or motivations.

As the noble Lord, Lord Hodgson, has said, accounts are becoming increasingly voluminous and complex. I do not believe that it is intended that the role of the FRRP should be to explain accounts to those who have not taken the trouble to understand them. Again, I return to the statement that it would be very easy to raise an issue on accounts. It may help the Committee to know that recently it took me three and a half hours to read from cover to cover—discharging my responsibilities diligently, I hope—the draft annual report on the accounts of a FTSE 100 company, the audit committee of which I happen to chair. That will give Members a measure of the kinds of documents that we are talking about.

The authorised person—in this case, the FRRP—should be required to exercise reasonable judgment before deciding whether to ask for documents and to pursue a matter. We must avoid a situation where every hint or suggestion, whatever its basis, gets followed up by the FRRP applying to the company for documents—which will not be short in volume, I am sure—otherwise, we will end up with an FR RP with a cast of thousands. One need only look at what has happened in the United States on the back of the Sarbanes-Oxley Bill, with the oversight board and the scale of its staffing, to understand what could happen.

Therefore, I urge the Government to employ a test of reasonableness. I beg to move.

Lord Razzall

In supporting my noble friend Lord Sharman, perhaps I may make one brief point that probably he would be reluctant to make. We ought not to build into the legislation a structure under which an auditor, in order to avoid potential criticism of himself or itself, will always ask for information. If this provision is passed in the form that the Government propose, there will always be a temptation for an auditor, whenever there is the slightest whiff of a problem, to ask for information and to impose even greater obligations on the company. Surely. we ought to have some test of reasonableness—otherwise, whenever there is the slightest whiff, it will be the refuge for any auditor simply to ask for more information.

Lord Evans of Temple Guiting

Clause 12 provides the Financial Reporting Review Panel Ltd. the body which reviews the annual accounts of public and large private companies, with a statutory power to obtain relevant information from the company and from any officer, employee or auditor of the company.

To date, the Financial Reporting Review Panel has relied on voluntary co-operation to get the information that it requires, and that has worked. The FRRP has rarely, in practice, encountered serious difficulties in obtaining what it needs to carry out an investigation. However, the FRRP is moving on to a proactive footing, which increases the number of accounts that it reviews. There is obviously an increased likelihood of a company failing to cooperate. For that reason, we are introducing to the clause a power for the FRRP to require the provision of documents, information and explanations that it may reasonably require to carry out its function.

The amendment addresses subsection (1) of the clause, which sets out the circumstances under which the authorised person—that is, the FRRP—can exercise its power. As drafted, the clause permits the FRRP to use its power where it appears that there is or may be a question whether the annual accounts of a company comply with the requirements of the Act. The amendment substitutes for this a test of reasonable belief that there is such a question.

The difference, in our view, comes down to the difference between there being an actual question and a possible question about whether the accounts comply with requirements. The noble Lord, Lord Sharman, is quite correct to imply and to say that our test, that there is a possible question about the accounts, is an easier test to pass than the one introduced by his amendment. This is deliberately so. We want the barrier to be set quite low. His amendment would require the FRRP to show that it believes such a question exists rather than to show that it appears that there might be such a question. We think that this raises the barrier too high.

The question of what the test should be, or how high or low the barrier should be, before the FFRP can exercise its powers raises some important practical considerations about how the FRRP is going to carry out its role of proactive enforcement. It might help if I provide an example which explains what our drafting allows, but which would be prevented by the amendment.

Suppose there is an accounting standard which is of particular relevance to one industry sector. Let us say that the FRRP uncovers serious problems with the way that one particular firm in the sector has dealt with that standard. The company under investigation may well assert that it is "common practice in the sector" or use as its defence that "they're all at it". If this is a credible claim, the FRRP will naturally be concerned that other firms in that sector have used similar accounting treatments and may conclude that it needs to require information from those other firms.

The problem is that in order to have a right to that information under the noble Lord's amendment, the FRRP will have to show that it appears to it that there is a question about those accounts. But it may not be able to do so. The reason for requiring information would be on the basis of circumstantial rather than direct evidence. In other words, the test may not be passed under such circumstances. On the other hand, the FRRP would certainly be able to show that it believes there may be a question, which is the test that we have put into the clause as drafted.

The difference goes to the heart of what it means to be a proactive enforcement body. At present, the FRRP waits for information about suspect accounts to come to it before deciding whether to open an investigation. Under the new regime, the FRRP will select company accounts for review based on an assessment of the risk, taking into account the likely impact on the markets and public confidence of a potential error in those accounts.

The way it will work is as follows. Following review of the selected accounts, the FRRP will determine whether, and if so, at what level more detailed investigations might be required. Where it is unclear whether the accounts do comply with the law, we would want the FRRP to be able to require further information to help the panel decide how to take matters forward. It is the FRRP's experience that many companies approached in this way are able to provide an explanation, for example, to provide or amplify a narrative description. From this it transpires that they do comply in respect of the particular matters raised and the matter is not pursued further, although frequently the net result is improved future disclosure by the company in question.

Nevertheless, we would not wish the FRRP to be precluded from requiring information about an issue on the grounds that there is an element of doubt over whether there is a question of compliance.

In summary, we do not wish the FRRP to be in any doubt over the circumstances under which it can exercise its powers. We believe that these circumstances have been drafted in sufficiently wide terms to achieve that. This is consistent with a proactive approach. To put it another way, if investigations can be carried out only when the FR RP has received firm evidence that there is a problem, we shall be back to square one with the existing reactive approach. I do not believe that this is what noble Lords wish to see.

The move to a more proactive regime was one of the key recommendations of the Co-ordinating Group on Audit and Accounting Issues which reported to the Government in the light of the Enron and other major accounting scandals. The aim of the clause is to support that move. In our view, the amendment would weaken the clause in a small but significant way. I therefore ask that the amendment be withdrawn.

4.30 p.m.

Lord Wedderburn of Charlton

I should like to preface a question to my noble friend by saying that I could not more strongly support the Government in their efforts to adopt a proactive approach in the way he has described. It is obviously the right policy.

However, I am disturbed by his example citing an accounting standard which might raise problems in a certain industry sector. He referred to how the problem might be based on circumstantial evidence, its effect on the market and so forth, and how that might give rise to reasonable grounds for a belief that there is a question over the compliance of the accounts. I do not know about the drafting of the amendment, but I took it to mean "a belief on reasonable grounds", which might have been a better phrase to use.

Can my noble friend give an example where there were no reasonable grounds for it appearing to the person involved, and where it would be sensible to raise the question?

Lord Evans of Temple Guiting

What we do not want to allow is random sampling. We do not want the FRRP to go on fishing expeditions and to approach firms where there is no reason to do so. The point I raised was this: within a group of companies, the FRRP finds a problem with one. It is then told by that company that the problem arises in other similar companies and so it decides to move on. I take the point made by my noble friend that that is not a precise example of the point I sought to make.

Lord Sharman

I have listened with great interest to the Minister. At the beginning of his remarks he had it absolutely right when he said that the bar should be raised just a little—as I have sought to do with my amendment. I am indebted to the noble Lord, Lord Wedderburn, for helping me with the drafting of the amendment. What he suggested sounded much more reasonable.

However, the issue is that of the fishing expedition, and I think we are at one on that. If there is a circumstance with no element of reasonableness in it, then we shall see an exponential explosion in the number of cases that arise. Industry and the FRRP itself will then become bogged down.

I should like to look in greater depth at what the Minister has said. In the mean time, I beg leave to withdraw the amendment.

Lord Sharman moved Amendment No. 72: Page 15, line 28, after "(3)" insert ", subject to subsection (3A),

The noble Lord said: We are still considering Clause 12. This amendment seeks to address the issue of who should have the principal responsibility for providing information to bodies such as the FRRP. I have started on the premise that the principal responsibility for providing information about the accounts of a company should fall with that company, its board of directors, its officers and its employees. I am not in any way opposed to the notion that the FRRP should also be able to request that the auditors provide information and explanations. I support the provisions allowing the FRRP to request that company auditors provide documentation, because sometimes that may be unavailable from the company itself. However, I do not believe that the FRRP should have unrestricted access to all the working papers of the auditors, which is what this amendment addresses.

Amendment No. 72 would make the application subject to new subsection (3A), which would state: Where the relevant person mentioned … is an auditor of the company, the reference to a document … does not extend beyond documents that have been exchanged between the auditor and the company, its officers or employees that are relevant to the particular matters being investigated". Again, this is a fishing expedition issue. I do not believe that the FRRP should be able to have access to the whole of the auditor's working papers en bloc. Access should be specific to the issue being considered and only to the relevant documents. I beg to move.

Lord Freeman

I support the noble Lord, Lord Sharman. I have no idea what the opposition Front Bench will say about this amendment, but I associate myself with what the noble Lord, Lord Sharman, said for a number of simple, practical reasons. The FRRP is bound to ask a catch-all question of auditors for documents. If the FRRP does not know which documents to ask for, it will ask for all documents, working papers and, indeed, correspondence exchanged with the audit client—the company—relating to a specific issue. That is the only way in which a request system can work. The noble Lord, Lord Sharman, is right to say that that presents a problem.

The Minister should offer to reflect on two specific problems at a later stage in our proceedings. First, the audit staff' will commit to writing fewer notes. That is bound to happen. I know that the argument will be made that, in the case of Enron, Andersen shredded a lot of documents. The shredding, not the documents, was the offence as far as Andersen was concerned. Nobody knows what was in the documents that were shredded in the Enron case. However, if the Bill is passed and these provisions are included, the auditor's job of reaching a true and fair view will be made far more difficult.

Secondly, when an auditor is preparing documentation, a lot of collateral information is collected—what other clients of the audit firm do, for example, in relation to calculating reserves of oil in the ground. If the FRRP requests all documents in relation to accounting treatment on reserves, for example, in the case of one company the auditor will have no chance to make a discretionary judgment but will have to release all the documents, including confidential collateral information which it is unfair to reveal. For those two reasons, I support my noble friend.

Lord Borrie

Does that mean that, if this amendment is agreed, no more information can be obtained from the auditor than can be obtained from a company?

Lord Freeman

No, not at all. As the noble Lord, Lord Borrie, will appreciate by studying Clause 12, the auditor has to respond to requests for information and explanations and must reveal all documents that have been exchanged with the company. The amendment tabled by the noble Lord, Lord Sharman, relates only to the internal working papers of the auditor. The provisions in Clause 12 that provide a let-out, which I am sure the noble Lord, Lord Borrie, has already put his finger on, do not go far enough in preventing the problems that the noble Lord, Lord Sharman, talked about.

The restrictions are that it is a defence to say that, as a professional firm, you complete legal professional privilege exemption. That will certainly not apply in many circumstances. The commitment by the FRRP not to pass on documents to third parties does not affect my argument; nor does the defence that documents obtained from the auditors will not be used as evidence in criminal proceedings. So none of those apply or in any way endanger or jeopardise the thrust of the argument made by the noble Lord, Lord Sharman.

Lord Wedderburn of Charlton

With respect, I have not quite understood the grounds of opposition. I understand the problem that it might be thought that this would give rise to requests and that the auditors would have to look into floods of documents. New subsection (3A) would apply to, documents … exchanged between the auditor and the company, its officers or employees that are relevant". On mentioning the Enron shredding problem, I wonder whether the noble Lord, Lord Freeman, did not overlook the fact that subsection (2) of the new clause applies to documents and "information or explanations". By limiting documents in that way, under new subsection (3A), one wonders whether that might have some inhibiting effect on the effect of new subsection (2) where the authorised person may require any of these persons to provide "information or explanations". In a shredding case, presumably, it would be "information and explanations" that would be relevant. Do noble Lords intend to limit "information and explanations" relating to documents which once existed to limitation under new subsection (3A)?

4.45 p.m.

Lord Sharman

That may be the inadequacy of my drafting. The reference in subsection (3A) is only to documents. It does not refer to "information and explanations". Therefore, my intention—I think this is what it says—is that the FRRP would be entitled to ask the auditor for any "information or explanations". It is only the documents—that is, working papers—that I am concerned about.

Lord Wedderburn of Charlton

Therefore, the FRRP could ask for "information and explanations" about any document.

Lord Sharman


Lord Hodgson of Astley Abbotts

I have two amendments in this group. Obviously, I listened carefully to the arguments on Amendments Nos. 72 and 79. I came to this point agnostic and listened with interest to the powerful points made. I should like to reflect on whether they are sufficiently strong to put the auditors in a special position.

My two amendments run in parallel because they focus on the potentially unreasonable demands that might result from the authorised person—planned to be the FRRP—having the power to demand that, any officer, employee, or auditor of the company must provide any document or "information or explanations" required. We want to address the concern caused by this drafting as regards any documents, any information or any explanation. Our amendments aim to confine that power strictly to explanations by or documents of the company.

As I read it, under the Bill as currently drafted, the authorised person may require documents, information or explanations stemming from other companies or sources, which could result in excessive or even impossible demands being placed upon an officer or employee of the company. In theory, for example, an officer or employee could be asked to produce a document belonging to another company to which he has no access. The consequence of not providing the authorised person with the requested document will be an application to the court, under Section 4. The court could require the person to take such steps as it directs under Section 5 for securing the required documents.

If the authorised person wished to gain access to documents from other companies, surely the approach must be made to the other companies. We would like the Government to take that on board as a subset of the important point raised by the noble Lord, Lord Sharman, on the special provision of auditors and auditors' working papers.

Lord Evans of Temple Guiting

I hope, during the next minute or so, to answer the very interesting points raised. As I have already said, Clause 12 provides the Financial Reporting Review Panel with a statutory power to obtain relevant information from the company, and from any officer, employee or auditor of the company. The aim of the amendments is to limit the information that the FRRP can require. Of course I am aware and understand noble Lords' desire that the FRRP's powers should be no wider than absolutely necessary.

We have already discussed the FRRP's move from a voluntary approach to a more proactive footing and the repercussions of such an approach. Let me assure Members of the Committee that we have considered what information the FRRP may need in order to carry out its functions effectively and who may have that information. We have taken careful note of the principles set out in the standards developed by the Committee of European Securities Regulators (CESR) on the enforcement of accounting requirements.

Standards issued by CESR are not legally binding in the sense that a directive would be; none the less, it is important, not least for the credibility of our arrangements internationally, that the UK complies fully with them. The Financial Services Authority, supported by the Financial Reporting Review Panel, has been at the forefront of taking them forward and getting their acceptance across Europe. One key principle is that a competent enforcement authority should have sufficient powers to obtain the information and explanations that it needs to undertake its work. That information needs to be available both from the company that it is investigating and its auditors.

Amendments Nos. 73 and 74 would limit the FRRP's powers to obtain documents of the company and explanations by the company. In the majority of cases, companies and others will co-operate with requests for information from the panel. Even where the FRRP needs to use those powers, it will in most cases be able to obtain documents that belong to the company, or explanations that refer to the company. But that need not always be the case. There may be documents that are not "of the company" but which fulfil the key criteria in subsection (2)—that is, they may reasonably be required for the purposes of discovering whether there are grounds for an application to the court under Section 245B, or for determining whether or not to make such an application.

A good example would be a letter from one director to another. The existence of such a letter might be referred to by an employee or director in the course of an FRRP investigation. The FRRP might then conclude that the content of that letter is crucial to determining the accuracy of the accounts. Were the noble Lords' amendments agreed, the FRRP might not be able to require production of that letter, if the directors could show that it was not "of the company". Other examples might be correspondence between a company director and a customer or supplier, or, to take the example given by the noble Lord, Lord Hodgson, between a director of one company and a director of another.

Those considerations are also relevant to Amendments Nos. 72 and 79, which, in the case of documents sought from auditors, would restrict the FRRP's access to documents that have been exchanged between the auditor and the company, its officials or employees, as we have heard in this discussion. However, in considering what papers the FRRP may require from an auditor, it will not always be the case that the only relevant papers are ones that have been exchanged between the auditor and the company or its officers or employees. For example, there may be a note of a meeting taken by the auditors and not exchanged with the company, which the panel may reasonably require for the purposes set out in this clause. It is relevant and has a bearing on the FRRP's work.

While I understand the concerns of the audit profession to protect audit working papers from the idle curiosity of others, we are not persuaded that in what we expect to be rare circumstances they should not of within the powers of the panel.

Although the clause in its present form indeed allows the FR RP to obtain documents, it does so within strict legal parameters. Those are set out in subsection (2). In short, that says that such information can be sought by the FRRP only if it is reasonably required by the panel to carry out its statutory function. Otherwise, it would have no power to require the information in question and, under subsection (5), I would not expect a court to make an order ensuring compliance with the FRRP's purported requirement.

I hope that these comments and explanations are sufficient to enable noble Lords to withdraw or not to press these amendments. However, I should repeat one point. The main restriction protecting the internal audit papers is that, under new Section 245F(2), the FRRP can ask for documents and so on that, he may reasonably require for the purpose of", carrying out his statutory functions. So the FRRP cannot simply ask for everything.

Lord Sharman

I am grateful to the Minister for his detailed response, to which I have listened carefully. I am grateful also to the noble Lords, Lord Freeman and Lord Hodgson, for their support in this matter.

I have to say that, as yet, I am far from convinced. I think that the noble Lord's familiarity with audit working papers is probably somewhat less than mine in the sense that I know what is in them. In drafting this amendment, I had in mind the advice I was given by a very leading attorney in the United States who told me that he thought the best working papers I could have would have nothing in them. Then he said, "You could have nothing proved against you". That is the advice that I got. I worry that the greater the likelihood of audit working papers being produced for all sorts of other things, the less there will be in them.

The noble Lord mentioned notes of meetings. Clearly those are outside the scope of the amendment, and that was an error on my part; notes of meetings and so on should be included. However, it is also true that there may well be whole rafts of information about industry practice and the affairs of other companies. In debating a previous amendment, noble Lords said that, at times, the FRRP will be examining a point and people will say, "This is an industry-wide practice". Will the FRRP ask the auditors for their industry-wide briefs? If so, we are going way beyond audit working papers and right into the technical workings of the auditing firms. That is what I am concerned about. I am concerned about the FRRP's very wide discretion in this regard.

I shall not delay the Committee much longer. I shall look very carefully at what has been said and probably return to the issue on Report. In the interim, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 73 to 79 not moved.]

Lord Sainsbury of Turville moved Amendment No. 80: Page 16, line 29, at end insert-— ( ) An order under subsection (4) must not—

  1. (a) amend Part 1 of Schedule 7B by specifying a person unless the person exercises functions of a public nature (whether or not he exercises any other function);
  2. (b) amend Part 2 of Schedule 7B by adding or modifying a description of disclosure unless the purpose for which the disclosure is permitted is likely to facilitate the exercise of a function of a public nature;
  3. (c) amend Part 3 of Schedule 7B so as to have the effect of permitting disclosures to be made to a body other than one that exercises functions of a public nature in a country or territory outside the United Kingdom."

The noble Lord said: This group of amendments have in common the fact that they all make changes to provisions in the Bill relating to information gateways.

I shall deal first with Amendments Nos. 80 and 98. These are part of the Government's response to the recommendations in the fourth report of the Select Committee on Delegated Powers and Regulatory Reform. We are very grateful to the Committee for its consideration of the delegated powers in the Bill and have accepted all the recommendations it has made. In paragraph 7 of its report, the Committee recommended that, the negative procedure with respect to the disclosure provisions in Clause 12 and Schedule 2 is appropriate so long as the power to add categories of person or disclosure were limited to public or other authorities and the purpose of facilitating the exercise of public functions".

Amendments Nos. 80 and 98 restrict the use of powers in Clause 12 and paragraph 17 of Schedule 2 to modify gateways for passing information. Their effect is to provide that new exceptions to the prohibitions on disclosure can be made only in respect of persons exercising public functions, or in relation to the exercise of public functions.

Amendment No. 99 rectifies an oversight in new Schedule 15D to the Companies Act 1985, which is inserted by paragraph 24 of Schedule 2 to the Bill. The effect of the amendment is to allow information gathered under the investigation provisions of the Companies Act 1985 to be disclosed to assist a body appointed under Clause 14—we intend it to be the Financial Reporting Review Panel—to exercise the functions that it will have by virtue of that appointment. Without the amendment, it would be possible to pass information to the FRRP for only some of its functions under the Companies Act, rather than for all its functions under that Act. That was not our intention, and the amendment seeks to rectify the omission. I beg to move.

5 p.m.

Lord Hodgson of Astley Abbotts

We are content with the amendments, and grateful to the Minister for having written to explain the background to them. We raise no objection to them.

On Question, amendment agreed to.

Clause 12, as amended, agreed to.

Schedule 1 agreed to.

Clause 13 [Power to specify bodies who may issue reporting standards]:

Lord Razzall moved Amendment No. 81: Page 17, line 11, leave out "may also make provision

The noble Lord said: I think that there is common ground between us that companies ought to adopt standards of corporate social responsibility. Indeed, research by Friends of the Earth, for which I am very grateful, demonstrates that Her Majesty's Government agree. In 1994, the Labour Party's environment policy, which was wonderfully entitled In Trust for Tomorrow, promised that when there was a Labour government there would be, a requirement on larger companies to report on environmental performance and strategy, helping to optimise resource use, reduce pollution, and disseminate best practice".

Of course, the Prime Minister made that a requirement of his own. In October 2000 in a speech entitled—would you believe it?—"Richer and Greener", delivered to the CBI and the Green Alliance, he challenged the top 350 companies in the United Kingdom to publish the reports by the end of 2001. He said then: I would also like to see more reporting on environmental and social performance. The pioneers of environmental reporting—companies like BA, BT, British Gas, and BP—are seeing increasing benefits from both improved efficiencies and public image as a result. This is something that all companies should be doing, and I am issuing a challenge, today, to all of the top 350 companies to be publishing annual environment reports by the end of 2001".

We are now in 2004. Tony Blair recently recognised the failure of his companies to live up to his challenge when he said: As far as I am aware, 124 FTSE 350 companies currently produce social and environmental reports".—[Official Report, Commons, 12/2/04: col. 1675W.] In the amendment, we ask the Government to live up to the challenge that the Prime Minister set, and to have it as a mandatory requirement for companies between now and 31 December 2005. I hope that the Government will support the amendment. I beg to move.

Lord Sharman

In supporting my noble friend Lord Razzall, I reiterate the declaration of interest that I made previously: I am a director of a number of listed companies; in particular, I am a director of British Gas, which my noble friend Lord Razzall and the Prime Minister mentioned.

Clause 13 adds to the powers of the Secretary of State to alter accounting standards. It inserts into Section 257 of the Companies Act the power of the Secretary of State to specify bodies that may set standards for matters to be included in company reports. The amendment adds to that permissive power a duty to ensure that standards for environmental and social reporting are put in place by the end of 2005. It allows the Secretary of State to nominate the body, or bodies, that would draw up those standards. I shall not repeat the various commitments that the Government have made in that regard, as my noble friend Lord Razzall covered them very well. The benefits of environmental and social reporting are becoming increasingly widely accepted.

It may be argued—although I would not agree—that the Bill is too early a stage at which to specify such standards. But the amendment does not specify standards; it just puts an enabling mechanism into place. It would also help, and perhaps strengthen the OFR and what will be in it when it comes, if the standards body could have the scope to set relevant specific indicators, for example. One of the great problems with social and environmental reporting today is that it is all over the place. There are no standards; different people do different things; some reports are audited and some are not, and so on.

I strongly support the amendment. We need to reach a position whereby one cannot simply say that bodies should report but then give no guidance.

Lord Hodgson of Astley Abbotts

The noble Lord, Lord Razzall, normally gives us bravura, combative performances, and today was no exception. Hearing him talk, I was reminded of the words of a hymn that I sang at school: Wider still and wider shall thy bounds be set". I felt that this was a matter where best practice should lead to encouragement rather than legislation. We are trying, at least on this side of the Committee, to ensure that regulation is kept to a minimum; therefore, where possible we should use encouragement rather than legal statute.

I do not wish to go back over my brewery example—the noble Lord, Lord Wedderburn, has gone now, so I think that I could dare to. Two of our 64 pages relate to corporate and social responsibility, covering subjects such as alcohol, working with the Prince's Trust and employee consultation. We also have a page on environmental policy. I talked about cooking oil on the previous occasion, but passive smoking and other such issues are also covered.

[The Sitting was suspended for a Division in the House from 5.8 to 5.18 p.m.]

Lord Hodgson of Astley Abbotts

I was responding to the point made by the noble Lord, Lord Razzall. I was saying that while the idea of companies being environmentally and socially responsible and reporting thereupon was a very good idea, I was not convinced that that should be made a statutory requirement. I was making the point that encouragement is the best way to obtain compliance.

I pointed out that most of the companies with which I am involved already take the matter seriously and that the report of the brewery to which I referred contained two pages relating to corporate and social responsibility. It also wishes to have a serious and sensible look at the way it acts in regard to the environment.

It is not just a question of a perfunctory tick in the box. We deal with attitudes towards alcohol, support for community education action zones, charitable donations, working with the Prince's Trust, listening to employees, diversity in work-life balance and a board on health and safety. In our environmental policy we cover issues such as passive smoking, energy and water use, solid waste, grease and cooking oil, sewage treatment, radon and refrigerants, and asbestos. This covers three pages.

I am not trying to say that that is unique; most companies now work in that direction. My concern is that, when that is put into regulations, one emphasises the letter as opposed to the spirit and it becomes a box-ticking exercise. Good companies will do it anyway because it gets their reputation better for their shareholders and it gets them a better rating in the City. Bad companies will simply go through the motions and tick the boxes. I am therefore in favour of seeing the practice continue on the basis of encouragement rather than statute for the time being.

I remind the noble Lord, Lord Razzall, that the title of the Bill is about auditing and investigation, not environmental and social performance. I am not saying that it is not worthy—companies should definitely be encouraged in that direction—but this is an audit and investigation Bill and we should not clutter it up with that matter at this stage.

Lord Sainsbury of Turville

The amendment would require an order to be made to specify a body to prepare a standard in relation to the environmental and social performance of companies for reports which the directors are required to prepare under Part VII of the Companies Act 1985. It would require the Secretary of State to make such a specification by 31 December 2005 and arguably—this appears to be the intention of the amendment—for the standard to be in place by that date.

I listened carefully to the noble Lord who moved the amendment and I can say—it may disappoint him—that the Government are in broad agreement with the views underlying the amendment. However, we intend to achieve a similar objective through different means. There is an important distinction to be drawn between the Prime Minister's challenge to companies to report of their own volition and a compulsory approach as proposed by the amendment. I see no reason why the Prime Minister should not issue a challenge to companies on the subject.

The noble Lord also ignored what is probably the latest statement on the subject, which is the important one made by my right honourable friend the Minister for Industry and the Regions. She announced in a Written Statement on 10 July 2003 the Government's intention to bring forward regulations to require certain economically significant companies to prepare a new report, the Operating and Financial Review or OFR. The Government believe that the OFR will make an important contribution to improving corporate governance through increasing transparency and accountability. It will provide shareholders with better and more relevant information on the business, its performance in the past and the directors' policies for the future.

The OFR will differ from existing reporting requirements by placing a strong emphasis on identifying the future prospects of the business and the factors, developments, opportunities and risks that might affect those prospects. Directors will need to include information on environmental, social and community issues where such information is necessary to enable shareholders to assess the strategies adopted by the company. The White Paper Modernising Company Law, published in July 2002, envisaged that a new standards board, to be created by the main companies Bill, would make standards for the OFR and other aspects of company law. However, because the Government now intend to introduce the OFR in regulations ahead of the main companies Bill, we propose to use the power conferred by Clause 13 to specify the Accounting Standards Board to make the first standards for the OFR, building on its existing statements of 1993 and 2003. We shall give full details of our proposals for the OFR when we publish the consultation document after Easter.

The OFR standard envisaged by Clause 13 will support the legislative requirement to be contained in the regulations and provide guidance on best practice. The standard will naturally expand on the legislative requirements and I assure Members of the Committee that these will cover environmental and social issues. It is therefore not necessary to make specific requirements for that in Clause 13.

Lord Razzall

I thank the Minister for that reply. I have some sympathy with the two points made by the noble Lord, Lord Hodgson. First, one of the reasons that, to use his phrase, we want to "clutter up" the Bill with the proposed new subsection is—as he knows about and expressed support for at Second Reading when we said so—that we have been waiting a long time for the Government's promised comprehensive review of company law. I believe that we have had six years of consultation and therefore we are using every opportunity available in legislation to add requirements that we feel ought to be implemented. It is not our fault that we need to clutter the Bill with this provision; rather it is—dare I say?—the inability of the DTI to secure the necessary legislative time in the Queen's Speech to enable a proper and comprehensive review of company law.

It is for that reason that we are a little sceptical of the Minister's comment that we shall see all this dealt with in the regulations that will require companies to produce the Operating and Financial Review, as, he rightly said, was promised in the 2003 White Paper. Those regulations are promised soon, but as we know, "soon" in the history of company law reform under this Government often happens to be never. That is our fear.

Dealing with the second point made by the noble Lord, Lord Hodgson, this is only an enabling subsection. The requirement that we are seeking to put in the Bill does not impose any standards or regulations on companies. It is simply an enabling provision to enable standards to be produced. For that reason, we do not think it falls foul of his criticism to the effect that we are imposing regulations on companies.

Having said that, I shall read all that has been said by the noble Lord and the Minister and think further on it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments 82 and 83 not moved.]

Lord Hodgson of Astley Abbotts moved Amendment No. 84: Page 17, line 27, leave out "and other supplementary and incidental

The noble Lord said: Clause 13 is one of the shorter clauses of the Bill and is entitled, Power to specify bodies who may issue reporting standards". The clause amends Section 257 of the Companies Act 1985 by enabling the Secretary of State to specify a body to issue standards relating to reports which the directors are required to prepare. Indeed, the Minister has just referred to this. Subsection (4B)(b) specifies that an order made by the Secretary of State, may contain such transitional and other supplementary and incidental provisions as the Secretary of State thinks fit". We are well aware that this wording is identical to that found in Section 19 of the Companies Act 1989, as well as in several other Acts. But the Government will equally be aware that we, in principle, dislike open-ended powers. Perhaps the Minister could enlighten us as to why the Government think that "other supplementary and incidental provisions" will be needed in this case. We understand the need for "transitional provisions", but "supplementary provisions" are another matter. I beg to move.

Lord Sainsbury of Turville

This amendment would remove the ability of the Secretary of State to make supplementary and incidental provisions in the order specifying a body to prepare reporting standards, principally for the Operating and Financial Review.

We recognise that it is always desirable to limit the number of order-making powers to those which are precisely needed. In Clause 13 we have sought to ensure that the proposed provisions on reporting standards are as close as possible to the existing provisions on accounting standards. The power to make supplementary and incidental provisions reflects similar powers in Section 256(4) of the 1985 Act on accounting standards.

The noble Lord opposite tabled similar amendments to Clauses 4 and 14, and we have already debated that on Clause 4. In each case where powers are to be conferred by the Bill, we have considered how the powers may be exercised. The inclusion of the power to make supplementary and incidental provisions in Clause 13 was based on extensive precedents. By definition it is designed to cover those matters that may not become apparent until the order is drawn up. I therefore cannot tell him definitely how it might be used.

However, as we have so far found no convincing examples to show why the power might be needed in this particular instance, and in the light of the points made by the noble Lord, Lord Hodgson, I am happy to agree to consider further whether we could accept the amendment. I hope that, in the light of that assurance, the noble Lord will feel able to withdraw it today.

Lord Hodgson of Astley Abbotts

In the light of that reply, I shall withdraw the amendment very quickly indeed.

Amendment, by leave, withdrawn.

Clause 13 agreed to.

Clause 14 [Supervision of periodic accounts and reports of issuers of listed securities]:

5.30 p.m.

Lord Hodgson of Astley Abbotts moved Amendment No. 85: Page 18, line 24, leave out "is to" and insert "may

The noble Lord said: I wish to raise some specific points before moving on to debate the question whether Clause 14 should stand part of the Bill.

Amendment No. 85 raises a point concerning the rapidly increasing burdens to be placed on the FRRP. This amendment focuses specifically on this issue by proposing a change to the wording of subsection (7). As discussed, this subsection allows the FSA to refer certain cases which may not fall within its remit to the FRRP to review. It concludes with the words, the body [which is the FRRP] is to exercise those functions [the review of periodic accounts] in relation to that issuer as well". The amendment would change "is to" to "may", giving necessary flexibility.

Since the responsibilities of the FRRP have increased to such an extent, it seems overly prescriptive to force extra cases on the FRRP which it previously would not have had to review. The amendment is designed to give the FRRP some manoeuvrability. It has also been tabled to probe the Minister to enlighten us as to whether the Government intend these extra responsibilities to be limited solely to the FRRP or whether there are other bodies in mind. Will other bodies or units help with any overflow or will these tasks be restricted to the FRRP? If other bodies are to participate, perhaps the Minister could enlighten us on which ones the Government think are likely to be appropriate?

What about the costs involved? Will the FSA have to pay any costs of investigating cases which it asks to be looked into? If not, what safeguards are in place to prevent the FRRP from becoming a free investigatory arm of the FSA? I beg to move.

Lord Sainsbury of Turville

I shall attempt to address the issues raised by the noble Lord, but perhaps I may first make the point that we have in mind that the FR RP would be the body to do this. We do not have any other bodies in mind.

Before I address the main issues raised, I think it would be helpful if I set out how the clause itself operates and why we have included subsection (7), the subject of this amendment.

The clause is about widening the scope of the Financial Reporting Review Panel. The FRRP is a well-respected and effective body which, as I have already explained, is moving on to a proactive footing as a result of the post-Enron review carried out by the FRR P itself and by the Co-ordinating Group on Audit and Accounting Issues.

Clause 14 expands the role of the FRRP. It does not specify the FRRP as the "appointed body", but it is our intention to appoint the Review Panel of the FRRP to perform this task. At present, the job of the FR RP is to look at the annual accounts of companies. It will continue to do that. It is an important part of maintaining confidence in corporate standards and it is a task that the FRRP has discharged very effectively.

But we are also concerned, of course, with establishing confidence in the financial markets more generally. Not all accounts are annual and not all bodies which trade securities on the UK markets are companies. We want to build on the FRRP's success by expanding its remit into these new areas.

This clause gives the Secretary of State the power to expand the remit of the FRRP in two directions to address these wider concerns. The first direction is in respect of which documents the FRRP will be checking. Company law requires publication only of annual accounts, and thus at present that is what it reviews. Interim accounts are a requirement purely of the listing rules, and this clause therefore enables us to bring those within the scope of the FRRP as well.

However, it is the second direction of expansion which is relevant to this amendment. This relates to the overlapping populations caught by company law and securities law. Many issuers whose securities are traded in the UK are not companies as defined in the Companies Act—they could be UK building societies which issue debt, or UK companies which issue equities and are established by Royal Charter. And, of course, there are a number of overseas companies which have listings in the UK, but fall outside the FRRP's current remit.

Again, we believe that for at least some of these cases, it makes sense for the Financial Reporting Review Panel to have a role in reviewing their accounts—but not necessarily in all cases. That is why subsection (5) states: A body may be appointed either generally or in respect of any of the following, namely … any particular class or classes of issuers". Our intention is to appoint the FRRP in respect of some, but not all, of the total population of issuers. It would simply not make sense to ask the FRRP to keep some classes of issuer under continual review—for example, overseas companies that issue only specialist securities such as Eurobonds aimed at professional investors. We do not believe that those types of issuer should be the focus of the FRRP's attention. However—and this is where subsection (7) comes in—we do believe that there should be a "back-up" provision that allows the Financial Services Authority, on an exceptional basis, to refer accounts to the FRRP which fall outside its new remit. That would be done on an individual, case-by-case basis.

The point is that, in regard to such issuers, it will be the FSA and not the FRRP that keeps them under general review. But if the FSA in the course of this general review decides that the accounts of one particular issuer raise concerns, then the FSA will be able to refer those accounts to the FR RP for it to bring its expertise to bear.

The noble Lord's amendment seeks to change the requirement for the FRRP to consider such a referral into an invitation to the FRRP to consider it. In his version of subsection (7), the FR RP would be at liberty to decline that invitation. I ask the Committee to resist such an amendment. We must always keep in mind the underlying purpose behind this part of the Bill, of which it is sometimes easy to lose track. That purpose is to reassure the financial markets that the UK regime for financial reporting is robust.

That is why we need Clause 14. We need the markets to know that while the FSA keeps overall responsibility for enforcing the listing rules, it will for the first time be able to use the FRRP's expertise in checking accounts against the accounting requirements of those rules.

We need subsection (7) because it is no easy task to draw the line around the FRRP's remit, and we want to ensure that even where something falls outside that line, the option remains open for the FSA to call on the FRRP's expertise. The FSA must be able to do so categorically, not at the discretion of the FRRP, otherwise the reassurance that it is offering to the markets would be incomplete. If the FRRP were to decline the invitation to help, then the FSA would have to do the best it could on the basis of its own expertise, which in the specific area of accounting requirements is not on the same level as that of the FRRP.

What I have described is in fact the current situation. In respect of unincorporated entities and interim accounts, there is currently no role for the FRRP, and so the onus of checking such accounts already falls on the FSA alone. One could ask: if it isn't broken, why fix it? The answer is one which I believe applies to a number of the provisions in the Bill; namely, that we are in the business of locking stable doors before the horse bolts. In other words, we have not had an Enron or Parmalat-type scandal here as yet and we want to do everything we can to ensure that that remains the case. So while we agree that the current system works well enough, where we see the scope for improving it, we must do so.

One small but important way of improving the system is to ensure that the FSA can call on the expertise of the FRRP in respect of a larger class of issuers. That is what Clause 14 does. For Clause 14 to operate as effectively as possible, we need subsection (7) to state unambiguously that the FRRP "will look at"—not "may look at"—the accounts of particular issuers referred to it by the FSA where those are outside its remit.

Lord Hodgson of Astley Abbotts

Before the Minister finishes, will he address the issue of costs?

Lord Sainsbury of Turville

The issue of funding has always been recognised as a difficult one. We acknowledge the difficulty of resourcing and planning for work that is demand-led, as will always be the case when the FSA passes on cases to the FRRP. The cases that fall within the FRRP's remit itself will presumably be dealt with in the same way as the existing population under the proactivity regime. We would suggest that the way to control the costs of FSA referrals is through a memorandum of understanding with the FSA, setting out expectations and limits on how the provisions will be used in practice.

Lord Hodgson of Astley Abbotts

I should like to think about the specific aspect of costs. However, I am grateful to the Minister for explaining how the clause will operate. We are still concerned that the FSA operates in some controversial ways and that some of its actions have been quite controversial.

It seems undesirable, to put it no higher, that the FRRP could be brought into play to back up an action by the FSA which may be of a controversial nature. That is why we believe that in any reasonable case the FRRP would wish to support the FSA—it is a regulatory body like the FSA and would wish to do so—but it should not be forced to do so in cases where it felt that the FSA was either taking a controversial stand or did not think the point being made by the FSA justified it becoming involved. The clause puts the FRRP in a supplicant position that we feel is undesirable. That is why we wish to replace "is to" with "may".

Having said that, I see the force of the Minister's points and we shall look again at his comments. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hodgson of Astley Abbotts moved Amendment No. 86: Page 18, line 25, leave out subsection (8).

The noble Lord said: I can be very brief. I am going for a major prize after my success with Amendment No. 84. We have considered the merits of Clause 14. As the Minister has pointed out, it lays out in considerable detail how the system will operate. We are extremely grateful to him for that. But then we come to subsection (8), which blows the whole thing apart because it implies, "If we did not think of it before, we will have it like that now".

The full operational and financial impact on the FRRP of the open-ended provisions of subsection (8) seems undesirable. That is why Amendment No. 86 seeks to remove the subsection. I beg to move.

Lord Sainsbury of Turville

The amendment would remove the ability of the Secretary of State to insert additional requirements into an order appointing a body to carry out the functions set out in Clause 14. As we have made clear in the Explanatory Notes to the Bill, we intend that this body will be the review panel of the Financial Reporting Review Panel Limited.

The role of the FRRP will be one of monitoring compliance by issuers of listed securities with accounting requirements of the listing rules under subsection (2) of Clause 14. The FRRP will also be able to use the power to obtain the information provided by Clause 12 when carrying out these functions. We therefore consider that it is prudent to enable the Secretary of State to set requirements on the way the functions are exercised.

It is in the nature of such provisions that I cannot tell the Committee definitely how the power will be used. But examples are often helpful in this regard, provided that they are understood to be purely hypothetical. For example, we might want to set out in the order appointing the FRRP to carry out this function certain requirements about the way in which it prioritises the work that comes to it. We might want to use this power to set out a procedure for the FRRP to publish the results of its activities.

These are hypothetical and it is more than likely that no such provisions will in fact be deemed necessary. None the less, I hope that the Committee will agree that it is sensible to provide such a power should it subsequently be decided that something of this nature needs to be specified in the order.

It is perhaps worth making the point—before the question is asked—why we need the power here but not in Clause 13. The FRRP will have a monitoring role and investigative powers and it is therefore quite possible that the Secretary of State may wish to set limitations or requirements on the way it exercises those functions. The body to which Clause 13 refers has no monitoring function; it simply sets standards. It is therefore far less likely that the Secretary of State would consider it appropriate to impose any supplementary or incidental provisions on the body. I make the point merely to show that we are not completely arbitrary in our approach to these matters.

5.45 p.m.

Lord Hodgson of Astley Abbotts

I thank the Minister for his response. As regards Clause 13, on reflection, I see the need for flexibility. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 14 shall stand part of the Bill?

Lord Hodgson of Astley Abbotts

I wish to address the provisions of Clause 14 at a more general level and to debate the issue that it should stand part of the Bill. We seek to probe the Government's thinking about the extent of the clause, how the supervision will be carried out and whether the requirements of the clause beat our tests of being proportionate and workable.

Clause 14 empowers the Secretary of State to appoint a body to review accounts and reports of listed securities. We have had a number of explanatory briefings from the Institute of Directors and the Institute of Chartered Accountants of England and Wales, which have raised a number of points with us. At present, it appears that the remit of the Financial Reporting Review Panel (FRRP) is limited to examining the annual accounts of Companies Act companies for departures from accounting requirements and, where necessary, applying to the courts to order the preparation of revised accounts.

The proposals in Clause 14 would extend that remit, enabling the FRRP to review interim and other periodic reports produced by listed companies in accordance with the listing rules, to which the Minister referred earlier. As the Minister pointed out, the FRRP would also examine the annual interim reports of entities that issue listed securities but are not Companies Act companies. The Minister referred to UK building societies and overseas companies, although I am not sure how those tie in with our difficulties regarding extra-territoriality, as debated earlier. They would take us slap-bang into the extraterritorial issue again.

At present, interim reports are not required to be fully audited. Yet, in the Bill, they are to be under the review of the FRRP. Will that place undue pressure on all companies, whether Companies Act companies or not, to have interim reports audited? I draw the attention of Members of the Committee to the yardsticks against which I have said we must judge the Bill. One of those is whether the Government's proposals are proportionate. Are these potentially time-consuming and cost-consuming requirements proportionate? Is not sufficient transparency already available through the FRRP checking annual reports? What makes setting the new standard in statute necessary, and why now?

We have also referred to the extension of the powers and duties of the FRRP under subsection (7) at the request of the Financial Services Authority. So the remit of the FRRP is to increase exponentially. As I see it, the remit of the FRRP, as proposed in the Bill, would be increased by the addition of all companies into the scope of its review, not just Companies Act companies; the requirement to review all interim reports—any period accounts and reports—not just annual reports and, additionally, the possibility of being requested by the FSA to review individual cases, such as those concerning specialist debt. Therefore, one can envisage a huge increase in the workload of the FRRP.

How is the FRRP to undertake these additional supervisory duties on its relatively modest budgetary estimates? Paragraph 246 of the Explanatory Notes gives some figures. It states: We estimate that the costs will increase, from around £2.8 million … to around £12 million per year by 2006". Is that a realistic figure? The noble Lord, Lord Sharman, raised this issue at Second Reading. It is worth noting that the FSA budget now exceeds £200 million per annum. I have not checked the budget to determine how much is spent on enforcement, but it is probably between 10 and 25 per cent. So it alone is spending between £20 million and £50 million on enforcement.

How will the FRRP, with a total budget two years from now of £12 million per annum, carry out the functions contained in the provision? The Bill is not clear on that and on the necessity of the duties being imposed on it. It would be helpful to have an explanation of the Government's thinking on those points.

Lord Sainsbury of Turville

The intention behind this clause is simple, although the background is a little complex. Perhaps I can deal with two points in the noble Lord's speech. Extra-territoriality does not come into the issue, because we are dealing essentially with companies listed on the UK Stock Exchange. Obviously, the FSA already has a position on that. We are dealing with the listing situation. Funding is covered by the tripartite arrangement, which we shall debate when we come to a later clause.

The clause is about widening the scope of the Financial Reporting Review Panel. The FRRP is a well-respected and effective body. We have already discussed—in the context of Clauses 11 and 12, in particular—the fact that it is moving on to a proactive footing, and that the Bill is strengthening its role. Clause 14 expands its role, allowing us to make the most of its expertise and excellent reputation. At present, its job is to look at the annual accounts of companies. For company law purposes, that is sufficient. But we are also concerned, of course, with establishing confidence in the financial markets more generally. Not all accounts are annual, and not all bodies that trade securities on the UK markets are companies.

Perhaps I may spell out in a little more detail the background, and how we arrived at the proposed arrangements. At present, the Financial Reporting Review Panel has the role of reviewing the annual accounts of certain listed companies and large private companies in Great Britain with a view to deciding whether to apply to court for the correction of defective accounts. It performs a similar function under Northern Ireland companies legislation. They check those accounts against the accounting requirements of the Companies Act 1985. But the panel's current function leaves some small gaps when it comes to reassuring the marketplace about the financial information published by UK issuers. The objective of the clause is to plug those gaps. Unfortunately, the interplay between company law and financial securities law is unavoidably complex. That, of course, is precisely the reason that we need to ensure that nothing is allowed to slip down any gaps between the two.

Under the Financial Services and Markets Act 2000, the Financial Services Authority (FSA) is required to maintain an official list of issuers. The FSA makes and enforces listing rules governing the admission of securities to the official list, and specifying the requirements on companies and other entities that list securities. Any issuer of securities listed in the UK must comply with the listing rules. A number of accounting requirements are contained within the listing rules, as one would expect.

Meanwhile, under the Companies Act 1985, the Financial Reporting Review Panel has been authorised to ensure the compliance of annual company accounts with the requirements of the Act. To that end, it is empowered to apply to the court for a declaration that accounts do not comply with the requirements of the Companies Act, and for an order requiring the directors of the company to prepare revised accounts.

For the purposes of explaining the clause, I need to start by pointing out three key differences between the financial services regime in respect of all listed entities, and the company law regime in respect of Companies Act companies. The first is the most straightforward: company law requires publication of annual accounts only. Interim accounts are a requirement purely of the listing rules; yet the accounts are prepared following the same accounting standards and are relied on in a similar way by shareholders and potential investors. It therefore seems logical to us—and to the Coordinating Group on Audit and Accounting Issues, which made the recommendation—for the Financial Reporting Review Panel to have a role in checking interim accounts in addition to annual ones.

However, because those are not company law requirements, the existing remedy of going to court for a restatement is not available. That is why, under subsection (2) of Clause 14, we are making provision for a body to be appointed to perform the functions of keeping under review the compliance of periodic accounts and reports produced in compliance with listing rules with the accounting requirements of those rules. The body appointed for that function is also given the function of informing the Financial Services Authority of any conclusions that it reaches. The FSA, as the body already tasked with enforcing the listing rules, will then decide on any corrective or punitive action. There are ranges of sanctions available to it under the Financial Services and Markets Act; nothing in the clause alters that.

The second and third differences relate to the overlapping populations caught by company law and securities law. There are a small number of UK issuers whose securities are traded but that are not companies as defined in the Companies Act—for example, some building societies that trade domestic debt, or companies that issue equities and are established by Royal Charter. There are a much larger number of overseas companies that have primary or secondary listings in the UK but are covered by the domestic law of their country of incorporation, not our company law.

Again, for at least some of these cases, it makes sense for the Financial Reporting Review Panel to have a role in reviewing the accounts. For example, the power could be used to extend the FRRP's remit to cover the accounts of overseas companies that have a primary listing in the UK, and the accounts of UK issuers that are not companies but which issue equities or domestic debt. But it will not be appropriate in all cases. For example, many overseas companies issue only specialist securities, such as Eurobonds, aimed at professional investors, and their accounts may not be prepared in accordance with international accounting standards. We do not believe that issuers such as I have just described should be the focus of the FRRP's attention.

There is still some work to be done with the FSA and the FRRP on deciding exactly how the interface between the two bodies should work. That is why the clause allows us to appoint a body—namely, the FRRP—in respect of any issuer of listed securities, but subsection (5)(a) then allows the body to be appointed in respect of particular classes of issuers.

I should also draw the Committee's attention to an important back-up provision. Subsection (7)(b) provides that the Financial Services Authority can refer particular issuers outside the remit of the FRRP, as expanded by this clause, to the FRRP on an individual basis, and that it will be able to exercise its statutory power and functions in regard to those issuers as well. The point is that the FR RP will not usually be required to keep those issuers under review as a matter of course, but will be required to look at them as a one-off exercise.

In summary, the FRRP has already built up an excellent reputation as an effective, independent regulatory body, and is being enhanced through the Bill and as a result of the post-Enron reviews. Therefore, we want the FRRP to take on additional responsibility for interim accounts of listed companies as well as its current functions with regard to annual company accounts. We also want it to take on responsibility for the accounts of certain listed entities that are not companies, where there is a real issue for the UK investor. In such cases, it would report to the FSA, which would decide the appropriate enforcement action. I move that this clause stand part of the Bill.

Lord Hodgson of Astley Abbotts

The Minister missed out two points. The first was the question of money. He paints a rosy picture of the FRRP chasing all sorts of villains all over the place, at the behest of the FSA, on a slim budget. I cannot see how a budget of £12 million will enable much to be done.

The second aspect was extra-territoriality, on which the Minister gave my question slightly short shrift. If one refers to the FRRP a non-UK company with a listing here, and it finds that there is a case to answer, it will presumably say that the company's accounts are defective. Presumably, in turn the sanction will be that the listing in the UK is withdrawn. I cannot see how commenting on the quality of an overseas non-UK-based company, and as such declining to continue to have its securities listed in the UK, is not an extraterritorial issue. It will strike at the credibility of that company, albeit that the hit would come from within the UK.

This is an important area, given London's international reputation in financial services. Although I would be delighted if the Minister commented further today, perhaps we should think more about the matter. There is a big issue of funding and of how we ensure that we can deal with extraterritorial points succinctly.

6 p.m.

Lord Sainsbury of Turville

The point is that this provision is in the context of listing in the UK. Clearly, there is a simple way of ensuring compliance—to say that one does not list in the UK. However, that is very different from talking about extra-territorial rights over the employees of a company in a different country. On that basis, the provision works.

Clause 14 agreed to.

Clause 15 [Application of provisions inserted by sections 11 and 12 to bodies appointed under section 14]:

Lord Evans of Temple Guiting moved Amendment No. 87: Page 19, line 35, at end insert and ( ) the references in section 245F(4) and (5) to "the court" were to the High Court or, in Scotland, the Court of Session.

The noble Lord said: We are due to debate Clause 15 as a whole in a few moments, and I do not wish to pre-empt that debate. Rather, I shall explain this amendment in terms of the policy aims that it is intended to implement, focusing solely on that part of Clause 15 which applies Clause 12—the power to require documents, information and explanations—to a "prescribed body" under Clause 14. I will not discuss the other part of Clause 15 that correspondingly applies Clause 11—the Inland Revenue gateway—to the "prescribed body", as this is not relevant to the amendment that we have tabled.

As we have stated, we intend that the "prescribed body" under Clause 14 will be the Financial Reporting Review Panel—FRRP. At present, the FRRP checks that companies' annual accounts comply with the requirements of the Companies Act 1985. Clause 14 extends the FRRP's functions to include the checking of periodic accounts and reports of issuers of listed securities. The main policy aim underlying Clause 15 is to ensure that the FRRP has the same powers to require documents, information and explanations when it exercises these new functions as it will have in exercising its existing functions.

Under Clause 12, the FRRP will be able to apply to the court to make an order requiring the production of documents, information and explanations. However, "the court" referred to in Clause 12, on page 15, lines 41 and 43, is defined in Section 744 of the Companies Act 1985 as, the court having jurisdiction to wind up the company". That is clearly appropriate in the context of Clause 12, which relates to the consideration of whether the annual accounts of a company comply with the Act.

However, Clause 14 is concerned with the supervision of "issuers of listed securities" that may or may not be a company. For example, an issuer could include some UK building societies. It is clearly necessary that the FRRP should be able to apply to a court to enforce its power to require documents, information and explanations in respect of issuers that are not companies when undertaking its duties under this clause. Therefore, it is no longer enough to rely on the definition of "the court" in Section 744, which relates only to companies. We must be specific and define the court to which the FRRP can apply when undertaking its functions under Clause 14. That is what this amendment does.

There has been no change of policy. This amendment is necessary to rectify an omission in order to allow the FRRP to apply to a court to enforce its powers in respect of all its functions. I beg to move.

On Question, amendment agreed to.

On Question, Whether Clause 15 shall stand part of the Bill?

Lord Hodgson of Astley Abbotts

I rise to speak to Clause 15. I did not wish to speak to the last amendment, because what I will say now will sweep up anything that I might have said about that.

According to the Explanatory Notes, Clause 15 permits the Inland Revenue to disclose information that it has obtained under Clause 11 to the Financial Reporting Review Panel—the body appointed under Clause 14. So far so good. However, the only people who could have possibly deduced that without reading those notes are those who wrote the clause. The clause is unintelligible at best. It is a perfect example—to return to the point made by the noble Lord, Lord Sharman—of why company law is in such urgent need of updating. Those problems have already been discussed at previous meetings of this Committee and at Second Reading. I am sorry, but I must again remind the Committee of what the Secretary of State said two years ago when the Government published "Modernising Company Law". She introduced the paper with the lines: The law has become encrusted with amendments and case law over generations … So the law needs to change. It needs to modernise and reform". Considering what she said then, I hope that Clause 15 has shocked the Secretary of State, not only because of the inadequate response to that White Paper that this companies Bill represents, nor because this meagre response comes nearly two years after the White Paper was published, but, more significantly, because Clause 15 considerably adds to the problem of encrustation rather than reduces it.

Within the first three subsections of Clause 15 there is reference to no fewer than seven different pieces of legislation—two different Acts of Parliament and five different statutory instruments. To understand the relevance of the first 20 lines of this clause one would have had to have absorbed five different sections of the Companies Act 1985, checked to see whether they have since been updated in the Companies Act 1989, and then apply them to three of the previous clauses of this Bill. Additionally, the same would have to be done with five different paragraphs from the Companies (Northern Ireland) Order 1986.

When I first discussed this Bill at Second Reading I said that we should measure the Government's proposals against four tests—the third of which was that the proposals were clear and workable. Clause 15 would not pass such a test. The clause does not modernise and reform company law, as Patricia Hewitt put it; it merely has the effect of highlighting just how imperative it is to initiate a complete overhaul of company law. I invite the Minister to explain the clause without, in the words of that famous panel game, deviation, repetition or hesitation.

Lord Evans of Temple Guiting

I will rise to the challenge if the noble Lord, Lord Hodgson, wants me to. However, I had better warn him that I have a long speaking note followed by a defensive briefing, the first page of which reads, "There must be easier ways of saying this". Later, if he is still interested, I have another page entitled, "I don't understand a word of this provision. Take me through it subsection by subsection". I would be delighted to do that. I propose to go through the speaking note and, if the noble Lord, Lord Hodgson, or other Committee Members would like me to carry on, I am happy to do so. Otherwise, I would be more than happy to arrange for the subsequent speaking notes to be handed over tomorrow so that they can be read at leisure.

Clause 15 is complicated but it does precisely what its title says it does—it applies the provisions inserted by Clauses 11 and 12 of the Bill to the body that is appointed under Clause 14. Since the body we intend to appoint under Clause 14 is the Financial Reporting Review Panel, what it actually does is ensure that the panel is able to benefit from the provisions in Clauses 11 and 12 in respect of its new work as well as in respect of its current work.

I will say a few words about the drafting. I believe that the clause looks much more complicated than it is because it ties together three previous clauses of the Bill, two of which amend existing companies legislation. Because the other one—Clause 14—relates to financial services and markets legislation, there is also some technical read-across in respect of issuers which are not Companies Act companies and in respect of Northern Ireland.

It is certainly true that one has to read the clause a number of times before its effect becomes apparent. I spent an hour on it yesterday afternoon, having turned off the cricket, and returned to it in the evening after I had had a couple of drinks, All of a sudden, it was tremendously intelligible. However, the Explanatory Note to the clause is useful. It states: The effect is that the FRRP will have the same power, and the same access to IR information, in respect of its activity under clause 14 (checking interim reports and reporting to the FSA) as it will when exercising its existing remit under Section 245C of the Companies Act 1985 (checking annual reports of Companies Act companies)". I think that that is reasonably clear.

There remains only the question of why the clause needs seven subsections and numerous cross-references to achieve that effect. The answer is twofold. First, we must recall that the FRRP itself is not named in the legislation. Legally speaking, the person authorised to secure compliance by companies with the Companies Act requirements need not be the same entity as the body authorised by Clause 14 to review accounts against the listing requirements. In fact, both functions are to be carried out by the Financial Reporting Review Panel. However, because no specific person or body is named in the legislation, either in this Bill or the 1985 Act, the clause had to be drafted in such a way that it extended the Clause 11 gateway and the Clause 12 power to the Clause 14 body, without any assumption that it would be the same body as already authorised for the related function under the 1985 Act.

Secondly, the functions under Clause 14 relate to finance and securities legislation rather than companies legislation, so they do not map across precisely to the existing functions that the FRRP carries out under the 1985 Act. In particular, Clause 14 covers Northern Ireland as well as Great Britain. It covers issuers that are not companies as well as those that are companies, and it relies for its enforcement mechanism not on an application to court in respect of defective accounts, but on a report to the FSA. It is because of those differences that Clause 15 has to make some technically difficult adjustments to the provisions introduced through Clauses 11 and 12, which make it appear rather fiddly and less straightforward than it actually is. I beg to move that this clause stand part of the Bill.

Lord Hodgson of Astley Abbotts

That was a bravura performance by the Minister. Of course, I can understand the Explanatory Notes, but shortly they will be history. The Bill will become an Act and away those notes will go. There is no way that one can gather the purpose explained in the Explanatory Notes from the text of Clause 15. I do not doubt the sincerity and goodwill of the Minister, but there is always a doubt whether what is said in the Explanatory Notes is given effect in Clause 15. However, I am grateful to him for reading into the record the background to the clause. It will be helpful to outsiders looking at our proceedings. If there is further information, perhaps he will circulate it so that we can use it instead of a Mogadon sleeping pill.

Clause 15, as amended, agreed to.

Clause 16 agreed to.

Clause 17 [Levy to pay expenses of bodies concerned with accounting standards etc.]:

Lord Hodgson of Astley Abbotts moved Amendment No. 88: Page 21, line 14, at end insert— (c) must take into account representation made to him by, or on behalf of, those who will pay the levy

The noble Lord said: Amendment No. 88 concerns Clause 17 entitled "Levy to pay expenses of bodies concerned with accounting standards etc.". As the title suggests, the clause empowers the Secretary of State to make regulations imposing a levy for meeting the costs of the bodies under Clause 16 that have received delegated powers under Clause 3. I also wish to speak to Clause 17 stand part. However, first, I shall focus on a more specific point of concern.

Subsection (5) of the clause lists the considerations that the Secretary of State must make when determining the rate of the levy payable. The two considerations given in Clause 17(5)(a) and (b) focus on the expenses of the body that is to receive the grant. Amendment No. 88 adds a further consideration; that is, the need to seek the views of those who will pay the levy. It adds that the Secretary of State, must take into account representation made to him by, or on behalf of, those who will pay the levy".

Paragraph 88 of the Explanatory Notes states that those anticipated to produce this levy are listed companies and the members of the Consultative Committee of Accountancy Bodies—that is, the ICAEW. the ICAS, the ACCA, the ICAI, the Chartered institute of Management Accountants and the Chartered Institute of Public Finance and Accountancy. Since they are to be the source of part of the funding it seems right that the Secretary of State should be obliged to consult them before deciding on the levy payable. I beg to move.

6.15 p.m.

Lord Evans of Temple Guiting

As the noble Lord, Lord Hodgson, said, the core costs of the Financial Reporting Council are met by the Government, listed companies and the accountancy profession in equal parts. The case costs of the Accountancy Investigation and Discipline Board and the Audit Inspection Unit fall outside this arrangement. I make this point for clarity purposes. They are met by the accountancy profession and are not expected to be covered by any levy.

The tripartite arrangement for funding core costs is entirely voluntary and has worked well until now. We hope very much that businesses and the profession will continue to contribute voluntarily in the future and that we will never have to use this levy power. The signs are very good. The FRC's initial consultation with business representative bodies suggests that they support our proposals to make the regulatory regime more robust and accept that business should contribute to the increased cost. The major accountancy bodies have also been supportive of the changes and the Government, under Clause 16. are seeking the power they need to contribute their share.

The aim of the levy provisions is to ensure that the Financial Reporting Council has security of funding, which is a key element of independence. The Government envisage that, as at present, the contribution of each of the three main funding constituencies—government, business and the accountancy profession—will represent one third of the total core costs of the FRC. It is not our intention to use the levy power to change this balance of funding or to impose a levy on bodies that are not currently part of the tripartite funding arrangements unless the FRC's activities are extended to cover other bodies.

I do not believe that the amendment is necessary. The FRC will have a new management board, one of the key tasks of which will be the preparation of the organisation's annual budget. Two of the members of the management board are the president of the CBI and the chairman of the CCAB, who are also directors of the FRC. As members of the management board, they will be aware of the business and accountancy profession contributors to the FRC's budget. As directors of the FRC, they will also be involved in the final approval of the budget by all five of the FRC's directors. Arrangements will also be made 10 keep the Government—the FRC's third financial sponsor—suitably informed and consulted about development of the budget each year.

Furthermore, it is our intention that listed company contributions should continue to be collected on behalf of the FRC by the FSA, along with the listing fee. The FSA consults listed companies annually on the level of the fee and we envisage that the contribution to the FRC will form part of that consultation. As with many other powers, the Secretary of State would of course take into consideration any relevant representation she received concerning the exercise of that power.

I hope that that explanation will satisfy the noble Lord, Lord Hodgson.

Lord Hodgson of Astley Abbotts

I am grateful to the Minister. I had not grasped that the CBI and the CCAB were ex officio involved in the preparation of the budget that leads to the setting of the fee levels. No doubt the noble Lord, Lord Sharman, would have put me right on that. But if they are ex officio involved, that provides the link that I was seeking in the amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 17 shall stand part of the Bill?

Lord Hodgson of Astley Abbotts

I seek to probe the principles behind Clause 17. Perhaps I may begin by reminding the Committee of what the Bill, in essence, attempts to do. In Chapter 1 of Part 1, it sets up a new statutory regime for the oversight and regulation of the accountancy and audit profession, working alongside other bodies, in particular the chartered institutes, which have their own responsibilities under charter for the professional standards of their members.

The revised organisation, the FRC, will be responsible for the formulation of accounting, auditing and associated standards, and for the oversight of financial reporting. This is the work carried out by the APB, ASB and FRRP boards of the FRC. Mr Keith Masson's wonderful chart has kept us all on the straight and narrow. Of the FRC's other work, the disciplinary work of the AIDB is paid for by accounting bodies participating in that scheme, and the inspection work of the AIU is directly funded through audit registration fees.

The accounting/auditing standards and financial reporting work in the past was financed through the goodwill of the accountancy profession, which had established arrangements for developing such standards well before the Government decided they must be involved. The profession had been under no obligation to do this work but had done it purely voluntarily. If the profession had not undertaken that work, it would have had to have been addressed by the Government and funded in some way thereby.

The profession has undertaken to continue funding the new arrangements for standard setting in a tripartite fashion. As the Minister has pointed out, the other two partners are government and business. This will be a condition of their continuing to be recognised as supervisory bodies. The logic of that arrangement is perfectly clear. As the Minister said, the profession appears keen to continue to operate as a fully equal partner in the regulatory framework and should therefore be prepared to bear its share of the costs. These costs, incidentally, the profession is anxious to point out, are much more than the third that the other partners are paying once the case costs of the AIDB and the inspections costs of the AIU, which are funded entirely by the profession, are taken into account.

The issue that has been raised with us is what should happen if there is a move from a voluntary arrangement of equal partners to the operation of the statutory levy under Clause 17. As the Minister pointed out, Clause 17 is a reserve power which would be operated only if the voluntary arrangements broke down. But, presumably, at that point it would be safe to say that the chartered institutes would have ceased to be recognised supervisory bodies and would therefore no longer he full partners in the regulatory framework.

In such changed circumstances, is it in principle right to impose a levy of this nature on the profession merely because it has voluntarily made a contribution to the development of accounting and audit standards and the oversight of financial reporting in the past? The briefing and questions that we have received raise the issue of whether it is fair to impose this levy in the future for all time. What is the Government's thinking behind this?

The key reason so far proffered by the Government is the importance of demonstrating to jurisdictions abroad that the new FRC arrangements are "independent" and cannot be held to ransom by a profession withdrawing its share of the funding. But, if that really is the case, would it not be more satisfactory, and certainly demonstrate a greater degree of independence, if, in the event of voluntary arrangements breaking down, the independence of the statutory regulator were guaranteed through direct government funding?

Further, there are some broader principles at stake. Should the Bill include a clause which coerces payment from one particular segment of the community for the development of standards which benefit not only it, but the community in general?

Let us consider who might benefit from the development of accounting, auditing and financial reporting standards. Certainly the Government do, in ensuring the operation of fair markets based on reliable financial information; and certainly business does, because audit is a service to it, and it relies on good standards of accounting and financial reporting to operate credibly.

So if the present arrangements were to break down, how could auditing and accounting bodies be assured that they would not end up paying for the process at a time when their privileged position as recognised supervisory bodies has come to an end? It has been put to us that the operatives in professions or businesses are not normally expected to bear the costs of developing the standards under which they work. Dentists do not pay for the development of clinical standards; or doctors for the development of standards on intensive care; or lawyers for the costs of the development of the law they operate. I look forward to hearing the Government's response to this remote—we hope—but nevertheless possible scenario.

There is a final point on Clause 17. The Explanatory Notes explain the procedure by which statutory instruments giving effect to this clause are made. Paragraph 89 of the notes states: The first regulations made in respect of the levy power—and any further regulations which change the persons or bodies by whom the levy is payable—will be subject to the affirmative resolution procedure … Any other subsequent regulations will be subject to the negative resolution procedure". Perhaps the Minister can explain where the quantum—the actual payable amount of the levy—fits into this. For example, will the initial amount of the levy be covered by the affirmative procedure, but subsequent increases by the negative procedure? If so, it hardly seems satisfactory or balanced.

Lord Evans of Temple Guiting

This clause will enable the Secretary of State, if necessary, to impose a levy to secure contributions to the funding of the independent regulator. At present—as we have heard over the past few minutes—the costs of the FRC are met by government, listed companies and the accountancy profession in equal parts. This is a voluntary arrangement and, as I said, has worked well until now.

The thrust of the changes we are making in this part of the Bill is to strengthen the independence of the regulatory regime. That is important for market confidence in the UK. Investors need to know that they can rely on company financial information. It is also important internationally, not least—as the noble Lord, Lord Hodgson, acknowledged—to persuade regulators in other countries that they can rely on our system.

A key element of independence is security of funding. That point is made consistently in the international arena by bodies such as the International Organisation of Securities Commissions and the Public Company Accounting Oversight Board. We need to be able to show that the FRC and its boards cannot be influenced by threats to withhold funding. So while I very much hope that contributors will continue to pay voluntarily, I believe that the power to impose a levy is absolutely necessary.

If we need to use this levy power, it may be some time in the future. For that reason, and because we recognise that the power is drawn widely in terms of the classes of person who may be required to pay the levy, we believe that it is right that the House should have an opportunity to debate the initial regulations setting the levy. Similarly, we think it right that any subsequent regulations which change the classes of person required to pay the levy should be debated by the House. I think that that is a very important protection in addressing the concern expressed by the noble Lord, Lord Hodgson, about the future.

Therefore, at this time I ask only that the Committee agree to the principle that a levy may be used, if necessary, to secure the funding of the FRC, in the knowledge that there will be an opportunity to debate the regulation providing for the levy if and when it becomes necessary to make use of the power.

Noble Lords have asked whether all regulations should not be subject to positive resolution. Since the first use—if any—of the levy could be several years in the future, it would, as I said, be appropriate for Parliament to have the opportunity to debate, under the affirmative procedure, the level at which the levy should be set and the classes of body that should be required to pay it. The Government consider that subsequent regulations varying the amount of the levy should be subject to negative resolution. However, if second or subsequent regulations should change the bodies or persons who will be required to pay, the Government consider that the affirmative procedure would be appropriate. As noble Lords will be aware, the Select Committee on Delegated Powers and Regulatory Reform considered that that was an appropriate level of parliamentary scrutiny.

The noble Lord, Lord Hodgson, asked whether, if the levy had been used and there was a subsequent move for a return to a voluntary system, the Government would be willing to consider it; and whether or not the law would prevent it. The regulations could be repealed, but the Government would need to look carefully at the reasons for the original breakdown of the voluntary arrangements.

I think that that is all I have to say on this at present and I hope that I have been able to reassure the noble Lord, Lord Hodgson, and any other Members of the Committee who have been worried by this clause.

6.30 p.m.

Lord Hodgson of Astley Abbotts

I am grateful to the Minister for that response. The need for independence is clearly understood on this side of the Committee but I am surprised that quantum is not within the affirmative resolution procedure. It seems to me that changes made to who pays are important and, from the way in which the Bill is drafted, it is clear that the Government accept that. But the amount they pay is just as important as who pays. I am surprised, therefore, that we could have a situation where. given the powers to be conferred, the negative procedure can be used for potentially dramatic increases. I hope that the Minister will think a little more about that. Quantum, as well as who pays, is an important issue. The point is worth considering again and I hope that the Minister will agree to that.

Clause 17 agreed to.

Clause 18 [Power to require documents and information]:

Lord Hodgson of Astley Abbotts moved Amendment No. 89: Page 21, line 41, at beginning insert "Where there appears to be good reason

The noble Lord said: We have now moved from Chapter 2 to Chapter 3 and are beginning a series of amendments on investigations. Clause 18 substitutes a new clause for existing Section 447 of the Companies Act 1985 giving the Secretary of State two powers. On the one hand, she can herself obtain documents from a company, as set out in subsection (2) on page 22, or, on the other hand, she can appoint an investigator to obtain documents from a company, as set out in subsection (3). In each case the power includes a power to require an explanation of the documents to be given by, among others, any officer or employee, or former officer or employee, of the company.

New Section 447 will preserve the distinction, on the one hand, of the power of the Secretary of State to require the production of documents and, on the other, the power of the Secretary of State to appoint investigators. But the most significant change to be introduced by this provision will be the extension of the power of the Secretary of State, and the power of investigators appointed by the Secretary of State, to seek information other than documents: the power to seek explanations of documents is instead to be expanded to be a power to require the provision of, such information (or information of such description) as may be so specified".

What is objectionable about new Section 447, and which this amendment seeks to address, is that it will omit the existing precondition that the Secretary of State must consider there to be "good reason" for the exercise of the powers under the section. Here we return to the point raised by the noble Lord, Lord Sharman, in another context earlier today. In existing Section 447, subsections (2) and (3) both begin with the words, The Secretary of State may at any time, if he thinks there is good reason to do so,…".

Paragraph 97 of the Explanatory Notes explains this omission on the grounds that the requirement for "good reason" is redundant given the restrictions imposed in any case by general administrative law provisions not to exercise powers on a trivial or irrelevant ground. However, the amendment of the statute specifically to exclude this requirement, which was previously explicit, is conspicuous and could be misunderstood. If it was deemed necessary to be included in existing Section 447, why is it disregarded in the redrafted section? Surely there can be no harm in making the requirement explicit so that the precondition for the exercise of the power can be readily appreciated by anyone in relation to whom the power is being exercised.

Without wishing to go over old ground, is it not extraordinary that the Minister should refuse to accept our amendments to Clause 8, Amendments Nos. 30, 34, 37 and 40, to leave out the word "vouchers", a clearly outdated term, on the grounds that any change to hallowed wording might lead the courts to draw the conclusion that the view of Parliament on a particular policy had changed? Yet to argue here that the words is good reason to do so can be dropped without the courts drawing a similar inference is surely extraordinary.

The Minister may not be concerned by this anomalous approach, but we are. I therefore beg to move.

Lord Sainsbury of Turville

As we have heard, this amendment would introduce to subsection (1) of new Section 447 the phrase, where there appears to be good reason". A similar phrase appears twice in existing Section 447, but it has not been repeated in Clause 18, which provides for a new Section 447.

I think that this is simply a case of a pathetic barnacle that is hanging on to the ship. It now needs to be prised loose and thrown overboard. I shall explain why, in a modest way, we have taken the legislation forward and thus show that these words add absolutely nothing. Although it may appear at first sight that the Secretary of State can use her powers under new Section 447 on a whim, and for no good reason at all, she is of course constrained in the exercise of these powers, as she is in the exercise of her existing powers, by the usual principles of administrative law. Her use of these powers can be challenged in the courts.

The courts can be asked to determine, in particular: whether a decision to use these powers was within the legal scope of the provision; whether it was made in pursuit of the policy and objects of the Act; and whether it was reasonable. As a matter of administrative law, the Secretary of State will need a good reason to act because she cannot act lawfully if she has a bad reason. She cannot act on grounds which are trivial, irrelevant or irrational.

It is as a result of this that, when we came to look at replacing Section 447, we concluded that it would be superfluous to include reference to the Secretary of State thinking that there is "good reason" to exercise her powers. As they stand, the references in Section 447 to "good reason" are not defined and the courts have given them no special meaning. They add nothing of substance. Clause 18 will substitute a new Section 447, but we intend no change of substance to the grounds for use of these powers or to the matters which can be investigated.

The removal of references to "good reason" does not add to the circumstances in which these powers can be exercised and it follows that putting them back in will not restrict those circumstances. I am sure that we can agree that we should avoid superfluous language, not least because superfluous words have a habit, over time, of acquiring or suggesting unexpected meanings. As I have said, this is a pathetic barnacle and we need to be rid of it. We look to the noble Lord for praise in this modest act of taking the legislation forward.

Lord Hodgson of Astley Abbotts

The Minister is removing a barnacle. He has given us an assurance that the omission of these words is not significant and that the courts can draw no other conclusion. Therefore I am happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hodgson of Astley Abbotts moved Amendment No. 90: Page 22, line 12, at end insert— ( ) Nothing in this section should result in a person being required to produce or disclose a document in respect of which legal professional privilege could be infringed.

The noble Lord said: In moving Amendment No. 90, I shall speak also to Amendments Nos. 91 and 91 A. We are still dealing with amendments to Clause 18 covering the power to require documents and information, and the provisions in Clause 19, entitled: Provision in relation to certain disclosures". The amendments focus on specific issues that I should like the Government to address before we come to a general debate on whether Clause 18 should stand part of the Bill.

As we noted in the previous debate, Clause 18 would replace the existing Section 447 with a new section. We believe that the new Section 447 extends too far in relation to requiring the production by third parties of documents that are not documents of the company. The current legislation, under subsection 447(4), gives the Secretary of State the power to require production of documents from persons other than the company under investigation. As the Bill stands, it is argued that these powers will be changed in a manner that could lead to considerable difficulties because it opens the way to arguments over what documents other than those belonging to the company such other persons can be required to produce. The extension in this new draft legislation could, for example, allow the Secretary of State to require the production of audit working papers from the auditors, or memos by lawyers in relation to their clients that are internal to the partners of that law firm. Again, we are going back over some of the ground covered by the noble Lord, Lord Sharman, earlier. The information and documents that the appointed person may require appear to be unrestricted—the company must produce whatever documents or information "the investigator may specify", as stated at line 12 on page 22.

There is a strong case that only documents that are those of the company under investigation—whether held by it or any other person—or documents in the company's possession should be required to be produced. That explains the reasoning behind Amendment No. 91. That amendment adds a safeguard similar to previous Amendments Nos. 73 and 74. With the present drafting, it is not clear whether the information or documents that can be requested have to be related to the company. That surely should be the case, hence Amendment No. 91, which reads: ( ) Any such information or documents must relate to the company specified by the Secretary of State under subsection (1)". Clause 18 also raises concerns in relation to the protection of legal professional privilege. Although we accept the Government's aim to bring in measures that help to restore investor confidence in companies and financial markets following recent corporate failures, legal professional privilege should not be undermined by the provisions of the Bill.

It is clear that on receipt of a request for information or documentation from either the auditors or the investigators acting in accordance with powers granted by the Bill, the recipient of the request or notice will have to consider the status of the documentation and information requested. Lawyers in particular will also need to consider their duty of confidentiality, which is fundamental to the relationship of solicitor and client.

The ditty of confidentiality exists as an obligation both in law, having regard to the nature of the contract of retainer, and as a matter of conduct. There is a distinction between the duty to keep client affairs confidential and legal professional privilege. The duty of confidentiality extends to all matters communicated to a solicitor by the client or on behalf of the client, irrespective of the source of the information. Whether the document or information is also privileged is a separate legal issue, as not everything which a lawyer must keep confidential is privileged. Where a document is confidential and also privileged it should not have to be disclosed at all, for any reason.

We have had an extensive briefing on the issue from the Law Society. The Law Society's position is that legal professional privilege is a fundamental common law right which should be upheld. Legal professional privilege is recognised by the English court as a substantive common law right, as well as a human right recognised under Articles 6 and 8 of the European Convention on Human Rights. Legal professional privilege is a common law right which is an exception to the general rule that all relevant evidence is both admissible and compellable before a court or tribunal. That means that a person—in this context, a company is a legal person and would seek advice through the officers of the company—can openly consult his lawyer with confidence that those discussions and the advice received cannot be disclosed. Such advice cannot be effectively obtained unless the client is able to put all the facts before his lawyer without fear that they may afterwards be disclosed and used to his prejudice.

Although legal professional privilege originally came into being in the context of lawyers giving advice about litigation, commonly referred to as litigation privilege, it has long been extended to non-litigious business—advice privilege. That is so that communications passing between a party and his or their lawyers, acting in their capacity as a lawyer, are privileged from production provided that they are confidential and created for the purpose of seeking or giving legal advice or assistance. Those purposes have to be construed broadly.

Merely because a client is speaking or writing to his or her solicitor does not render that communication privileged, however. Privilege applies to only those communications that directly seek or provide advice. or where information is passed by the solicitor or the client to the other in the course of keeping each other informed so that advice may be sought or given as required. That will include advice on what should prudently and sensibly be done in the relevant legal context. The concept of advice privilege has recently been clarified in the decision of Three Rivers District Council & Others v The Governor & Company of the Bank of England of 1 March 2003, when the Court of Appeal confirmed that advice privilege applied only to advice on legal rights and obligations.

It has long been recognised that legal professional privilege belongs to the client, he or she alone can waive it, and that a lawyer is under a duty to protect his or her client's privilege. In the context of requests received from auditors or by investigators, it still remains the client company's decision whether to authorise specifically the company's lawyers or other persons to provide privileged information to them and thereby waive their right to privilege. Clause 18, if not deleted in its entirety, should at the very least be amended to ensure specifically that neither the company nor any other person has to disclose privileged material in the course of investigations. Amendment No. 90 would ensure that neither the company nor any other person has to disclose privileged material in the course of investigations.

Noble Lords might observe that mention is made of legal professional privilege, as regards Clause 18, in Clause 19(4). However, the Law Society argues that this provision does little to alleviate concern. The Law Society is concerned by the current wording of Clause 19(4), because it appears to assume that privileged material will be disclosed. Therefore, this subsection seeks to absolve the lawyer from disclosing privileged material. The Law Society can see no justifiable reason why privileged material should be disclosed in the context of investigation under these provisions. An investigation should be based on evidence that is strong enough without having to waive legal professional privilege.

Clause 19 provides the lawyer with statutory protection from claims for breach of client confidentiality. That is all that this clause needs to do, since if Clause 18 is deleted in its entirety, or is amended to include a protection against the disclosure of privileged material, it does not need to go as far as is currently drafted in subsection (4). That is the reason for Amendment No. 91A, which seeks to remove subsection (4).

The policy of legal professional privilege requires that the client should be secure in the knowledge that protected documents and information will not be disclosed. It is incongruous that the Government, through the Department for Constitutional Affairs, on the one hand reaffirm the importance of legal professional privilege. A consultation paper issued by the Lord Chancellor's Department on 31 July 2002 states: Legal professional privilege is a cornerstone of the legal system. It serves the public interest because it recognises that it is in the interests of justice that a person consulting his legal adviser should be able to do so in confidence, since otherwise he may not feel able to be fully open about his position. This might impede his ability either to protect his rights or to defend himself properly in any subsequent action". On the one hand, the Government are underlining and stressing the importance of legal professional privilege, only to be seriously encroaching on its scope in these clauses. I beg to move.

6.45 p.m.

Lord Sainsbury of Turville

With Amendment No. 91, noble Lords are concerned to limit the range of documents or information that the Secretary of State or investigator might require a company or third party to produce. They consider that documents or information must relate to the company that is the subject of the Secretary of State's inquiries or is being investigated. However, we believe that it is unsatisfactory for two reasons. First, it would introduce precisely the kind of uncertainty that proposed new Section 447 is intended to address, by leaving room for argument about what is considered to relate to the company. Secondly, the test would most likely be too narrow to cover all the kinds of information or documents that might be relevant to an investigation.

For example, it might be necessary to investigate a company operating a franchise arrangement which has made false claims about the franchises that it has sold. The investigator will want to be able to require documents and information from franchisees, to discover whether the company's sales forecast or the claims that it is making are correct. We doubt that such information could be said to relate to the company under investigation, though it would clearly be highly relevant to the investigation of the company.

Another example might be business plans or projections drawn up before a company was formed, identifying the thinking of the company's promoters. In examples such as these, we were not convinced that a test such as that proposed would be wide enough to give investigators access to all the relevant information.

Instead, we have taken a different approach to qualifying the use of the powers. Under new Section 447(1) the exercise of the Secretary of State's power to appoint investigators must be in relation to a company. As a result, any information or documents requested by the investigators will need to be relevant to the concern which prompted the Secretary of State to appoint investigators. The same qualification applies to the exercise of the Secretary of State's own powers under new Section 447(2).

Let me now move on to the treatment of documents or information covered by legal professional privilege. I should emphasise that we do not intend to make any changes to the existing principle that neither the Secretary of State nor the investigators can compel the disclosure of documents which could be withheld in civil proceedings on grounds of legal professional privilege. Here I am referring to subsection (2) of Section 452. As we are widening the powers in new Section 447 to cover information which is not recorded, we are also extending this protection so that it covers such non-documentary information. The relevant provisions for this are to be found in paragraph 20(b) of Schedule 2, in new Section 452(2), on pages 54 and 55. As a result, we believe that Amendment No. 90 is unnecessary.

I have spelt out those exact issues because it may be that some people have not read as far as that in connection with the clause and it is important to do so.

We have extended this principle to new Section 448A in Clause 19. New Section 448A provides immunity from liability for breach of confidence to any person who, in breach of a contractual or other duty of confidence, provides relevant information to the Secretary of State in good faith and in the belief that it will help assist inquiries to establish whether a formal investigation is appropriate.

Amendment No. 91A seeks to extend the immunity in the new section to third parties, other than lawyers, who disclose information covered by legal professional privilege. However, although the new section approaches disclosure from a different tangent, we can see no logic in allowing so much information to be volunteered by a third party to the Secretary of State than could be required by the exercise of the investigation powers in Part 14. New Section 448A provides a very significant legal immunity and this immunity needs to be kept within reasonable and proportionate limits.

In other words, if we were to make the amendment we would confer immunity on legal professionals who break professional privilege. That is how I read it. I do not think that that is what the noble Lord seeks to achieve.

Lord Hodgson of Astley Abbotts

I am grateful to the Minister for his reassurance about the restrictions on the documents. I shall read carefully what he said. To be candid, the issues of legal professional privilege are quite abstruse; they are not easy for a non-lawyer to understand. I shall read carefully what the Minister said, consult again and perhaps come back on the issue at a later stage. To be honest, I cannot constructively respond at the moment because it is a difficult issue. As the Minister rightly pointed out, there are a number of places in the Bill where the issue arises. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 91 not moved.]

On Question, Whether Clause 18 shall stand part of the Bill?

Lord Hodgson of Astley Abbotts

We have just had a long debate about legal professional privilege and restrictions on the Secretary of State's power but we still have concerns about the provisions of Clause 18 and the arrangements within new Section 447. Another major change in the clause is the proposal to dispense with the procedural defences and simply to allow a court to decide whether or not an individual has a reasonable excuse for not producing a document or explanation.

Under the existing provisions, a director is liable to a relatively small fine; under the new provisions he can be dealt with as if he is guilty of contempt of court and be liable to an unlimited fine or imprisonment. It should be noted that, in theory at any rate, this is a considerable increase in potential liability.

From the discussions that we have had, we remain to be convinced that the increased powers for DTI investigators are necessary. There appears to be no evidence to suggest that DTI investigators have been substantively delayed or compromised because under present statute the DTI lacks some necessary power to proceed effectively. If the Minister or his officials have examples, it would be helpful if they could be shared with the Committee.

The briefing from the Law Society explains that the experience of solicitors who have been involved in DTI investigations is that the balance between the powers of the inspector and the protection of companies and third parties from over-extensive powers has been appropriate. DTI investigators' reports have, as a general rule, been very thorough and have not been qualified by their ability to reach a conclusion because documents or other information have not been provided and there has been no legal way of accessing them.

There is a concern that some of the safeguards that maintain this balance would be eroded by the provisions of the new legislation. We appreciate the Government's desire to address public concerns arising out of high profile business failures and the need to restore investor confidence. However, strengthening the company investigations regime will not directly address the various underlying causes of company failure. The clause seems only to strengthen the ability of the Secretary of State to report on company failure and does not appear to be necessary.

Lord Sainsbury of Turville

Clause 18 replaces Section 447 of the Companies Act 1985. Section 447 contains the powers used in the overwhelming majority of company investigations and it is central to the ability of the company investigations regime to uncover misconduct. But practical experience of Section 447 has identified a number of limitations. As a result, we are replacing Section 447 with a new section which widens and strengthens existing powers. The main aim is to improve investigators' access to relevant information, but I should emphasise that the new section does not change the circumstances in which, or the purposes for which, these investigation powers can be used.

It might be helpful if I begin with some background before turning to the detail of the clause. There is a range of powers in the Companies Act 1985 which allows the Secretary of State, or someone authorised by her, to inquire into the affairs of a company and related matters. In practice, these inquiries are mainly carried out in two ways: by appointing inspectors to investigate and report; or by authorising an individual, usually one of DTI's own investigators, to require a company to produce documents.

The first of these—the appointment of inspectors—now happens very rarely. In almost all cases nowadays the second mechanism is used and investigations into a company will be conducted, on a confidential basis, by an authorised individual. It is this kind of investigation with which Section 447 is concerned and which we are debating here.

As I said in the debate on Amendment No. 89, the Secretary of State may use her powers only where there is a sound basis for her to do so. This means, among other things, that investigators cannot go out randomly selecting companies to look at. Instead, an investigation will usually result from a complaint received from the public or from evidence passed on by another regulator. This information is then put through a thorough vetting process to establish whether investigation is warranted. Some 95 per cent of complaints are weeded out at this stage, either because an investigation is not justified or because the matters raised are more appropriate for other regulators. In 2002–03, around 350 investigations were carried out, affecting less than 0.04 per cent of registered companies. I want to emphasise that the process is designed to ensure that company investigations are carefully and appropriately targeted. Well-ordered and well-run companies are not the focus of attention of the powers.

Perhaps I may now turn to the detail. Currently, investigators can require a company to produce any documents that they specify. If documents which the investigators want to see are held by someone else, the investigators can require that other person to produce them. In addition, they can require an explanation of the documents from the person who produced them or any past or present officer or employee of the company.

However, there is no general power to require answers to questions unrelated to documents produced. Some companies use that to refuse to answer even the most straightforward questions or to help the investigators identify relevant documents. Some companies also choose to challenge whether relevant questions which occur to an investigator when he reads a document can truly be said to be requests for explanations of the document.

In addition, it is open to argument what kinds of documents—other than company documents or documents held to the company's order—a third party can be required to produce. That means that it may be difficult for an investigator to get hold of, for example, the internal papers of a trading partner or independent contractor. These papers may be highly relevant to uncovering wrongdoing on the part of the company.

Finally, aside from documents, third parties are often in a position to provide highly relevant information, but currently cannot be compelled to do so as a general rule. New Section 447 seeks to address these limitations, improving the access of the Secretary of State and investigators to relevant information from the company under investigation and improving the access of investigators to relevant information from third parties.

The Secretary of State will be able to require a company to produce documents and information. Of course, currently, the Secretary of State can require a company to produce documents, but the general power to require information is new. The Secretary of State will also be able to authorise an investigator to require the company under investigation or any other person to produce documents or provide information. That is a wider power than at present. Currently, there is no general power for investigators to require information.

We are also preserving a range of existing provisions supplementing the powers. Therefore, documents or information can be required to be produced at such time and place as is specified by the investigator or Secretary of State and they can be required immediately. Documents which are produced can be copied or extracts taken from them. A lien on a document will not be affected by production of the document in compliance with Section 447. Reference to "document" includes information recorded in any form—for example, on paper or electronically. Finally, information recorded other than in legible form—for example, electronically—can be required to be produced in legible form—for example, in "hard copy"—or in a form from which it can readily be rendered visible and legible—for example, on a floppy disk.

As is currently the case, there will be no obligation to comply with a requirement under Section 447 to the extent that it would involve disclosing information which could be withheld in civil proceedings on grounds of legal professional privilege. There will continue to be a measure of protection against banks being forced to disclose confidential information about their customers' affairs. That is covered by Section 452, to which we are making minor and consequential amendments.

Turning to sanctions, we are repealing the existing offence of failing to comply with a requirement under Section 447. A new sanction is provided for by Clause 21, which allows the failure to be dealt with as though it were a contempt of court. It is crucial that company investigators have swift and ready access to all relevant information if they are to be successful. Most of the time investigators will be examining the activities of live companies in response to complaints from sources such as members of the public and other regulatory organisations. Depending on what an investigator finds, follow-up action may be appropriate; for example, criminal investigations or taking proceedings to wind up the company or disqualify the directors.

The company investigations regime is a key mechanism for identifying and dealing with misconduct. We must ensure that investigators have the right tools at their disposal to be effective. The noble Lord, Lord Hodgson, asked why we need these powers. In recent years, we have seen a steady rise in the number of complaints about misconduct in companies. In 2002–03, some 5,000 complaints against companies were received. That represents an increase of 44 per cent over the number of complaints received five years earlier in 1998–99, even though the number of registered companies rose only by 23 per cent during the same period.

As the number of complaints rises, investigators are finding that the limitations to the powers in Section 447, which I have outlined, are hampering their investigations. In carrying out an investigation, the preferred approach of the investigator is to build a relationship with the company based on co-operation. However, investigators are finding that they are meeting increasing resistance. In 2002–03, the average time for completion of an investigation was 213 days from receipt of a complaint against a target of 188 days. That had slipped from 207 days in 2001–02. The wider powers contained in new Section 447 are intended to address the kinds of resistance that investigators face. It is in everyone's interest that an investigation is completed as swiftly as possible.

On that basis, we think that Members of the Committee will understand that this clause is essential and should stand part of the Bill.

7 p.m.

Lord Hodgson of Astley Abbotts

I began to think that the Minister was detailing a wish list of everything that the Government would like to include in the Bill. Clearly, if there has been the increase in the number of complaints that the noble Lord said—I am sure that there has—and there are points of specific resistance that the clause will address, we are content that the clause should stand part of the Bill.

Clause 18 agreed to.

Clause 19 [Protection in relation to certain disclosures]:

[Amendment No. 91A not moved.]

Clause 19 agreed to.

Clause 20 [Power to enter and remain on premises]:

Lord Hodgson of Astley Abbotts moved Amendment No. 92: Page 23, line 31, leave out "thinks" and insert "reasonably believes

The noble Lord said: Our final two groups of amendments concern Clause 20, entitled, "Power to enter and remain on premises". Amendments Nos. 92 and 95 return to the "reasonably believes" argument. Clause 20 introduces new Section 453A, which provides powers for inspectors and investigators to enter and remain on premises that they believe are used for the purposes of the business of the company that they are investigating.

The proposed new power is broadly drafted. Under draft Section 453A(2) of the Bill, An inspector or investigator may at all reasonable times—

  1. (a) require entry to relevant premises, and
  2. (b) remain there for such period as he thinks necessary".
The key phrases are "thinks", "reasonable times", "relevant premises" and "remain there for such period of time as he thinks necessary".

Amendments Nos. 92 and 95 would replace "think" with "reasonably believes" in new subsections (1)(b) and (2)(h) of new Section 453A. Amended subsection (1)(b) would read that an inspector or investigator must "reasonably believe" that entering and remaining on the premises "will materially assist him". Amended subsection (2)(b) would read that an inspector, "may remain there for such period of time as he reasonably believes necessary". That new power considerably increases the search and entry powers under Section 448 of the Companies Act 1985. Under the existing powers, an inspector or investigator must obtain a search warrant on the basis of information given on oath.

[The Sitting was suspended for a Division in the House from 7.8 p.m. to 7.16 p.m.]

Lord Hodgson of Astley Abbotts

Before the Division Bell rang I was talking about the need to replace the word "thinks" in new Section 453A(1)(b) and 453A(2)(b) with the words "reasonably believes".

As currently drafted, the new clause increases considerably the search and entry powers under Section 448 of the Companies Act 1985. Under the existing powers, an inspector or investigator must obtain a search warrant on the basis of information given on oath by, or on behalf of, the Secretary of State, or by the investigator. The new powers are exercisable unilaterally by the inspector or investigator, if he thinks that they will materially assist his investigation of a company. In those circumstances, we believe that the use of the word "thinks" is too wide a definition and thus open to abuse. The test of reasonable belief is well established in law and would be a better test in the circumstances. I beg to move.

Lord Sainsbury of Turville

These amendments relate to the powers in new section 453A that allow an inspector or investigator to require entry to. and to remain on, premises. An inspector or investigator can exercise those powers only if he or she thinks that they will materially assist in the exercise of his or her functions—in other words, that they will advance the investigation. Once on the premises, the inspector or investigator can stay only for as long as he or she thinks necessary for the purpose. The word "thinks" is used in the new section; these amendments would replace it with the words "reasonably believes".

It is not necessary, however, to write in an express reasonableness requirement. Inspectors and investigators perform public functions and the ordinary principles of administrative law apply to their exercise of powers. If no reasonable person in the inspector's or investigator's position could think that to require access to the premises in question will advance the investigation, the power to require access will not be available.

An inspector or investigator's conclusion about how long he or she needs to stay on the premises will similarly be qualified. For example, if an inspector or investigator thinks that he or she needs to stay on the premises for the rest of the day, but a reasonable person in the inspector's or investigator's position would consider it necessary to stay for only half an hour, it will be unlawful for the inspector or investigator to stay for more than half an hour.

We are not seeking to give inspectors and investigators unlimited powers or to lay down entirely subjective tests for the exercise of those powers which would render such exercise effectively unchallengeable. But it would be undesirable to write express tests of reasonableness into this clause. That would have an uncertain effect on other powers in this part of the Bill which are not expressly qualified in that way.

Perhaps I should add that the power is not one of search and seizure, and no force can be used. That is why there is no question of a search warrant. In the light of what I have said, I ask the noble Lord to withdraw the amendment.

Lord Hodgson of Astley Abbotts

I think that the Minister was saying that, in administrative law, "thinks" equals "reasonably believes"—that they are effectively one and the same. If he will forgive me, I would like to reflect on that, talk outside and see if I am supported in that view. In the mean time, however, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hodgson of Astley Abbotts moved Amendment No. 93: Page 23, line 33, at end insert "during normal office hours

The noble Lord said: We continue, for the last time, with amendments to Clause 20. In moving Amendment No. 93, I shall also speak to Amendments Nos. 94, 96 and 97. Many of the arguments which applied to the previous set of amendments concerning overly broad and imprecise drafting of the Bill also apply to the issues dealt with in the amendments. The requirement for the power to be exercised only at reasonable times appears to regulate both the time of gaining entry and the time during which the inspector or investigator may remain on the premises. However, although the Explanatory Notes comment that: A visit to business premises outside the company's trading hours would not ordinarily be regarded as taking place at a reasonable time", there is no guidance in the draft provisions themselves as to what that reasonable time might be.

Indeed, it seems to be contemplated in the draft provisions—proposed new Section 453B(5), at line 27 of page 24—that the inspectors or investigators can gain entry and remain on the premises when no person engaged in the company's business is present. Again there is no guidance on the period during which the inspectors or investigators can remain on the premises—which may, it should be noted, be domestic premises. The only requirement to be fulfilled is that the period is to be such as the inspectors or investigators judge necessary.

Under the circumstances it is desirable to limit the power, which could otherwise be used oppressively but with little prospect of effective challenge to obtain redress. We suggest that the right of entry should be restricted to normal office hours—hence Amendments Nos. 93 and 94. There is no justification for permitting dawn raids on the unilateral, unfettered decision of one person, much less for enabling inspectors or investigators to demand access at night. Simply relying on a reasonable time requirement to prevent such activity is insufficient.

Similarly, we suggest that the normal maximum period for remaining on the premises should be limited to one month. It should be remembered that that could include remaining in a person's home where the home is used for business purposes. Nevertheless, we accept there may be cases where that period would be insufficient. As the use of the power in the first place has to be authorised by the Secretary of State, it should be left to the Secretary of State to authorise any longer period for remaining on premises. That can be seen in Amendment No. 96, which inserts a provision that the inspector or investigator may remain on the premises for such period as he thinks necessary, not exceeding one month (or such longer periods as may be authorised by the Secretary of State)".

Moving from reasonable hours we come to "relevant premises". In proposed new Section 453A(3) relevant premises are defined as, premises which the inspector or investigator believes are used (wholly or partly) for the purposes of the company's business". According to the Explanatory Notes, at paragraph 119: If only a part of premises is used for the company's business, the power to require entry will enable the inspector or investigator to gain access to, and remain on, that part. This may involve passing through parts of the premises not used by the company … 'Relevant premises' also include any part of domestic premises which the inspector or investigator believes is used by the company for the purposes of its business, even if that part is also used for other purposes. The … investigator will be able to move around 'relevant premises' to which he or she has gained access and will not be confined only to a limited area (for example, one room". If that is the intention, we are not clear that the drafting of the Bill achieves it. In the light of "wholly or partly", it could be construed that a house, part of which contains an office, would qualify in its entirety as "relevant premises". There is nothing in the draft statute that explicitly restricts the investigator's access to parts of the premises used for the company's business.

The proposed power goes too far in permitting inspectors and investigators to enter and remain on domestic premises. It is to be remembered that there is already an existing power to obtain a search warrant in Section 448 of the Companies Act 1985. The general utility of the proposed new power is surely not sufficient justification for the possible interference with privacy and family life in cases where the company's premises are also used for domestic purposes. That will probably be most often the case where the company under scrutiny is small.

Those reasons suggest that it would be right to include Amendment No. 97, which inserts at the end of proposed new Section 453A(3) in Clause 20 the requirement that the definition of "relevant premises" should, exclude any premises (or parts of premises) which are occupied by any individual as a dwelling". I beg to move.

Lord Sainsbury of Turville

The amendments seek in different ways to limit the scope of the powers in proposed new Section 453A, and, I would argue, to restrict the likely effectiveness of the provisions.

Proposed new section 453A provides powers for inspectors and investigators to require access to, and to remain on, premises that they believe are used wholly or partly for the purposes of the business of the company they are investigating.

It can be critical to an investigation for inspectors or investigators to be able to gain access to company premises or to other premises where records of the company are held or its business is carried on. In many cases, that access is gained with the consent of the company under investigation. But there are a number of investigations each year where the progress of the investigation is frustrated by the delaying tactics of the company or its officers. In those cases, the ability to get on to the company's premises and to meet the people involved will enable the inspectors or investigators to exercise more effectively their powers to require the production of documents and information under Sections 434 or 447.

Bearing that in mind, perhaps I may take each amendment in turn. Amendments Nos. 93 and 94 seek to limit the powers in new Section 453A so that they can be exercised only during "normal office hours". But it is very difficult to be certain about what are "normal office hours". Whose normal office hours are we talking about: those of the company under investigation, or those of businesses generally? Companies have widely differing hours of business; for example, although many companies may trade between 9 a.m. and 5.30 p.m., a company operating a call centre that wants to reach people at home might trade during weekday evenings.

I assume that the intention is that the powers should be exercisable only during the normal business hours of the company under investigation. Some companies do not have normal or regular hours of business at all. Further, it is the company itself that determines what are its normal hours of business, and some companies might vary their hours precisely in order to frustrate an investigation. So it is highly undesirable to attempt to limit the powers in that way.

However, we have sought to place a sensible limitation on the times when those powers can be exercised. We have provided that the powers can be exercised only at reasonable times. That is an important safeguard. A visit to premises at a time of day when a company that has regular trading hours is not trading is unlikely to be regarded as taking place at a reasonable time. But the circumstances will determine that. We cannot make hard and fast rules.

Amendment No. 96 seeks to control the amount of time that an inspector or investigator can spend on premises to which he or she has gained entry under new Section 453A. The apparent intention is to provide that an inspector or investigator can stay for a month at most, unless he or she is authorised to stay for longer by the Secretary of State.

I suggest that the amendment is unnecessary. The first line of subsection (2) qualifies not only paragraph (a) of that subsection but also paragraph (b). So, although an inspector or investigator can stay for as long as he or she thinks necessary to further his or her investigation, the inspector or investigator cannot remain on the premises at any time that is not a reasonable time. The inspector or investigator will have to leave when it ceases to be reasonable for the company or other occupier to have him or her there. I suggest that, in most circumstances, that will happen in a matter of hours rather than days or weeks.

By providing expressly, as this amendment seeks to do, that an inspector or investigator cannot stay for more than a month without additional authorisation, we would be implying that it could be perfectly reasonable in many cases for an inspector or investigator to remain on premises continuously for a month. That would be undesirable. It would weaken the safeguard provided by the "reasonable times" test.

Of course, an inspector or investigator may visit the same premises on more than one occasion. But the company is protected because the inspector or investigator will need to have the necessary grounds to require entry on each occasion. I should add that I do not think it would be desirable to have any specific limit on the amount of time which inspectors or investigators can spend on premises. The "reasonable times" test is a real safeguard, but it also allows each case to be judged on its particular circumstances.

Amendment No. 97 seeks to exclude people's homes from the definition of "relevant premises" in new Section 453A. "Relevant premises" are the premises to which an inspector or investigator is to be able to require access under this new section. As the new provisions stand, an inspector or investigator will be able to require access to any premises which he or she believes are used for the business of a company under investigation, including premises which are used both for that purpose and for other purposes too. This includes residential premises—for example, a director's home—if the inspector or investigator believes that these premises are also used for the purposes of the company's business.

It is important that inspectors and investigators should be able, in appropriate circumstances, to have access to residential premises used for a company's business. In practice, the companies which are investigated under Section 447 are predominantly small and it is under Section 447 that the overwhelming majority of company investigations are carried out. Many small companies use the home address of, for example, one or more of their directors as their registered office or trading address, and this address may be the only place where documents relevant to an investigation are kept. Indeed, in some cases the company's only business premises may also be residential premises.

There are great benefits to an investigation in having access to premises used for the company's business. It speeds up the process of acquiring relevant documents and information, helps to avoid possible obstruction and enables the inspectors or investigators to get a clear picture of the company's activities. This can only help the effective uncovering of fraud and malpractice. "Premises" here refers specifically to that part of the premises used for business. So that issue is taken into account in that way. In the light of what I have said, I would invite the noble Lord to withdraw Amendment No. 93 and not to move Amendments Nos. 93 to 97.

Lord Hodgson of Astley Abbotts

As I understand it, the Minister seems to think that writing in "one month" undermines the safeguards that are built into the Bill; that the "reasonable times" test is better; and that there is no justification for concern about people's privacy.

The amendments came indirectly from Mr George Bompas QC, a very experienced company lawyer in this field. He felt quite strongly that the balance was being shifted the wrong way. I should like to read what the Minister has said, talk to Mr Bompas to see whether he feels we need to take the matter further—he obviously knows a great deal more about it than I do—and, if necessary, bring it back again at the next stage. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 94 to 97 not moved.]

Clause 20 agreed to.

Clauses 21 and 22 agreed to.

Schedule 2 [Minor and consequential amendments relating to Part 1]:

Lord Sainsbury of Turville moved Amendments Nos. 98 and 99: Page 53, line 35, at end insert— ( ) An order under subsection (3) must not

  1. (a) amend Schedule 15C by specifying a person unless the person exercises functions of a public nature (whether or not he exercises any other function);
  2. GC 264
  3. (b) amend Schedule 15D by adding or modifying a description of disclosure unless the purpose for which the disclosure is permitted is likely to facilitate the exercise of a function of a public nature."
Page 60, line 18, at end insert— A disclosure for the purpose of enabling or assisting a body appointed under section 14 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (supervision of periodic accounts and reports of issuers of listed securities) to exercise functions mentioned in subsection (2) of that section.

On Question, amendments agreed to.

Schedule 2, as amended, agreed to.

Lord Evans of Temple Guiting

This may be a convenient moment for the Committee to adjourn until Thursday at 3.15 p.m.

The Deputy Chairman of Committees (Lord Haskel)

The Committee stands adjourned until Thursday.

The Committee adjourned at twenty-six minutes before eight o'clock.