Grand Committee Report of 16 March 2004

Official Report of the Grand Committee on the
  Companies (Audit, Investigations and Community Enterprise) Bill [H.L.]
  (First Day)
  Companies (Audit, Investigations and Community Enterprise) Bill [H.L.]

    The Committee met at half past three of the clock.
    [The Deputy Chairman of Committees (Baroness Cox) in the Chair.]
    The Deputy Chairman of Committees (Baroness Cox): Before I put the Question that the Title be postponed, it may be helpful to remind your Lordships of two points of procedure for today's Committee stage. Noble Lords will speak standing; and the House has agreed that there shall be no Divisions in the Grand Committee. Therefore, unless an amendment is likely to be agreed to, it should be withdrawn.
    I should explain what will happen if there is a Division in the Chamber while we are sitting. The Committee will adjourn as soon as the Division Bells are rung and will resume after 10 minutes.
    Title postponed.
    Clause 1 [Additional requirements for recognition of supervisory bodies]:
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 1:
    Page 2, line 28, after "action" insert "available to the body"
    The noble Lord said: I start with two detailed amendments—Amendments Nos. 1 and 4—which look into the detail of the new provisions in Clause 1 of the Bill which is to be inserted into Schedule 11 to the Companies Act 1989. I have a number of general comments to make on the new structure for the recognition of supervisory bodies as set out in Clauses 1 and 2, but I shall reserve them for our debate on Clause 1 stand part.
    I propose to consider one aspect of the proposed new paragraph 12A which sets out the process for independent investigation for disciplinary purposes of public interest cases and additional arrangements for those disciplinary investigations, as set out in paragraph 20.
    The amendments stem from discussions that we have had with the Institute of Chartered Accountants in England and Wales. One of the new criteria for recognition as a supervisory body is participation in independent arrangements for the investigation and taking of disciplinary action in relation to public interest cases. As I understand it, that alters the existing situation where to qualify as a supervisory body, a body must have in place rules and practices relating to discipline of its members which are fair and
    GC 14
    reasonable and effective arrangements for the investigation of complaints—see Schedule 11, paragraphs 11 and 12.
    Now we have a requirement for additional independent investigations which will be carried out by one of the new arms, presumably, of the FRC. The institute has commented that it is fully acceptable that the Accountancy Investigation and Discipline Board (AIDB) disciplinary tribunals should be able to exercise all the supervisory bodies' disciplinary powers. Indeed, the existing paragraph 12(2) in Schedule 11 to the 1989 Act already states that,
    "The arrangements may make provision for the whole or part of that function to be performed by and to be the responsibility of a body or person independent of the body itself'.
    However, the institute stresses that the penalties available to the AIDB disciplinary tribunals should not be different from those that the members of the body have agreed to allow their institute to impose on them. The Minister may argue that that position is implicitly recognised by the words in lines 30, 31 and 32 on page 2, which are that,
    "that decision is to be treated as if it were a decision made by the body in disciplinary proceedings against the member".
    For clarity sake, we believe that it should be more explicit. No penalty should be imposed which is not provided for in the disciplinary scheme of the body itself. The accountancy bodies have confirmed to us that they have an extensive range of powers, all of which they accept should be available to the AIDB disciplinary tribunals without restrictions. Therefore, I beg to move.
    The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): Perhaps I may say at the outset how grateful I am to noble Lords opposite for their constructive approach in preparing for this Committee; an approach which is shared by the Government and which I trust we can maintain throughout the Bill's passage through the House. For their part, the Government are keen to improve the Bill wherever possible and we shall consider all proposed amendments. I can assure the Committee that I shall listen to the arguments with an open mind.
    Having said that, I turn to Amendments Nos. 1 and 4 with a fairly closed mind, as I shall explain. I do not believe that these amendments are necessary or desirable. I shall not clarify them on the lines suggested by the noble Lord. I shall explain why. The aim of the provisions in respect of independent investigation and discipline is to set out the minimum requirements for appropriate independent disciplinary arrangements. These cover what we see as the most important elements of such arrangements—the functions of the arrangements, their transparency and their independence. The functions of the arrangements are set out as: the investigation of public interest audit cases; the holding of disciplinary hearings where it is considered desirable; and the taking of decisions as to whether—and if so, what—disciplinary action should be taken.

    GC 15
    I consider that it is important that the sanction imposed by a disciplinary tribunal in a particular case should be the one that is appropriate for the failure in that case, taking into account all the relevant circumstances. The sanction imposed should be driven by the conduct, not by the membership of a particular body. One potential effect of the amendment is that the maximum sanctions that were available to disciplinary tribunals in respect of the same conduct could differ, depending on which supervisory body an individual was a member of. I believe that such a situation would not be in the public interest.
    So, we are explicitly saying that we do not think that because a particular recognised supervisory body does not have a specific disciplinary procedure, that is no reason why the Accountancy Investigation and Discipline Board should not be able to use it. When one looks at the matter in that light, it would be unfair if that was the situation.
    Lord Hodgson of Astley Abbotts: The Minister's last point was a powerful argument. I was not aware that different supervisory bodies had different penalty ranges. We should like to check with the various recognised bodies to explore with them what the Minister has said and to see their reactions to it. Meanwhile, I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    On Question, Whether Clause 1 shall stand part of the Bill?
    Lord Hodgson of Astley Abbotts: I rise to speak to the Question whether Clause 1 stands part as a general introduction to Chapter 1 of the Bill. I tabled the stand part debate in part for my own benefit but also for the benefit of the wider public outside the House. As I emphasised, as did many other noble Lords, at Second Reading, the Bill tackles only a very small part of company law.
    We know that in 1998 the Government believed that there was a pressing need to overhaul company law in its entirety since it was, in another Minister's words,
    "encrusted with amendments in case law over generations".
    Six years on we are perpetuating the encrustation process with the Bill under discussion today.
    The first 22 clauses create another layer of amendments in three specific areas of company law: auditors, accounts and reports and investigations. I have spent the past two months or so trying to get my head around those 22 clauses. It is a bewildering and at times a depressing activity. In some places one is required to turn to the Companies Act 1989, which itself amended parts of the 1985 Act. Unless one has immersed oneself in company law since the 1985 Act and can therefore track the changes and the evolution process of which the Bill is the culmination, it is very difficult to comprehend.
    GC 16
    I found myself at times wanting to table an amendment only to be told that the provision or requirement already existed in some small section buried in the depths of the 1985 Act. It would be appropriate at this juncture to extend my thanks to Keith Masson and the Bill team, who have been an enormous help in responding to a variety of queries of this nature. Their chart, which is on the wall of the department, is an extremely valuable and useful illumination.
    On the basis that it has been difficult for me to understand, I thought that it would be helpful to extend such illumination to the outside world and to allow the Minister to put on the record in plain and simple terms the changes that Clauses 1 to 5 make to the current system—that is, changes to the existing self-regulatory auditing profession and in the creation of a statutory element through the POBA. For that reason I have tabled a separate clause stand part debate to both Clause 1 and Clause 3.
    I accept that some of what I shall say involves Clause 2 but it is almost impossible to disentangle Clauses 1 and 2 and I cannot have a two-clause simultaneous stand part debate.
    Clause 1 amends Part 2 of Schedule 11 to the Companies Act 1989 by setting out additional requirements that accountancy bodies must meet in order to be recognised as supervisory bodies for auditors. These are: the setting of standards relating to professional integrity and independence; the setting of technical standards; the independent monitoring of audits of listed and other major companies; and the independent investigation for disciplinary purposes of public interest cases. Perhaps in confirming that in his reply, the Minister will also confirm that their existing powers of supervision and recognition remain unchanged.
    Clause 2 then expands on these four areas in a new Part 3 to Schedule 11, which sets out the arrangements. The emphasis in Clause 2 for the arrangements for carrying out these four new functions is on the fact that they must be done independently of the main body. The clause headings here feature the word "independent" at the beginning of nearly every clause. I am not quite sure how that will work in practice. For instance, let us take the Institute of Chartered Accountants in England and Wales. Under Part 2 of Schedule 11 to the 1989 Act, it cannot be recognised as a supervisory body for the accountancy profession unless it fulfils a number of requirements. It has to have rules, arrangements and standards that deal with the qualification of auditors, their professional integrity and independence, technical standards, monitoring and enforcement of compliance with its rules, discipline and investigations et cetera.
    On top of that, the ICAEW will now have somehow to duplicate four of those provisions via arrangements done independently of itself. To elaborate, paragraph 10 of Part 2, Schedule 11 to the 1989 Act reads:
    "The body must have adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules".

    GC 17
    That is to say, to make sure that only those with appropriate qualifications undertake company audit work and that standards are maintained et cetera. On top of that—I refer to subsection (4) of Clause 1—we now have the newly proposed paragraph 10A, headed,
    "Independent monitoring of audits of listed and other major companies",
    on page 2, beginning at line 6, with paragraph 19 at page 3, line 19 in Clause 2. Paragraph 19(1) states that the arrangements for independent monitoring of audits of listed and other major companies,
    "referred to in paragraph 10A(1) are appropriate funded arrangements—

    (a) for enabling the performance by members of the body of company audit functions in respect of major audits to be monitored by means of inspections carried out under the arrangements, and

    (b) for ensuring that the carrying out of such monitoring and inspections is done independently of the body".

    My question to the Minister is simply this: if we already have paragraph 10 which says that the ICAEW must make sure all its members comply with its rules, why should we have a provision saying that the ICAEW must make arrangements for further independent monitoring of how its members perform company audit functions for listed companies?
    Currently, accountancy firms have a statutory obligation to carry out company audits in accordance with the rules set down by the recognised supervisory body, and the body has a duty to monitor that. Why then do we need this new independent third check? How will this be carried out independently of the recognised supervisory body? Presumably that means delegating to another outside body. How does this fit in with the new regulatory structure for audit and accountancy under the umbrella of the FRC; that is, the Auditing Practices Board, the Accounting Standards Board, POBA et cetera?
    I make the further assumption that this "independent monitoring" will be done by one of the branches of the FRC—POBA or the FRRP. This would tie in with Clause 4(5) because the Explanatory Notes talk about POBA being involved in functions under the arrangements of paragraphs 17, 18, 19(1) or 20(1) of Schedule 11. But if that is the case, I am unclear how it will work because, as I understand it, POBA and the bodies like it will be set up by and under the FRC, whereas what is required by Part 3 is independent monitoring—page 3, lines 19–20—not the product of arrangements made by recognised supervisory bodies. This imposition of statutory regulation under the FRC to complement the already existing self-regulation through the recognised supervisory bodies runs the risk of creating a complicated, multi-layered regulatory system. I think that all Members of the Committee would benefit from further clarification of how the measure will work in practice.
    It is terribly easy to skim over Clauses 1 to 5 because they are innocuous enough—we are all for independent monitoring and standard setting, you might think—but do they really add anything to what already exists and will they improve efficacy and
    GC 18
    effectiveness? If we are not clear that they will, are they strictly necessary? What has prompted them beyond a wish to appear to be making a change? How will the new provisions sit side by side with the new reformed FRC?
    Can the Minister tell us what has changed to make this extra layer of independent supervision necessary in terms of standard setting, monitoring and discipline? Will it not be an added burden, administratively and financially, for recognised supervisory bodies? We know from paragraph 22 in Clause 2, which defines "funded arrangements", that the bodies in question must fund these independent arrangements.
    I finish with some comments on the arrangements set out in paragraphs 17 to 22 on pages 3 and 4 of the Bill. Clause 1 provides for the establishment of what appear to be, although it is by no means clear: independent bodies to set standards for the professional behaviour—paragraph 17; technical standards—paragraph 18; and independent monitoring of major audits—paragraph 19. There is no real guidance as to how those bodies are to be appointed, who their constituent members will be or what their qualifications will be. There is negative guidance in paragraph 21(2) on page 4 of the Bill, which is helpful so far as it goes. Therefore, the way in which these bodies are constituted appears to be down to the accountancy profession. This is a complicated clause and I believe that the Committee would benefit from some clarification on these general points.
    3.45 p.m.
    Lord Freeman: I declare an interest in relation to the Bill as a former partner of PricewaterhouseCoopers but now a consultant. However, I speak for myself and not for the Institute of Chartered Accountants in England and Wales. Rather than repeat the same points of principle time and again, it may be for the convenience of the Committee, and certainly of the Minister, if I follow the example of my noble friend Lord Hodgson and simply outline my central concern relating to a number of amendments.
    I believe that the profession as a whole—I refer to the chartered accountants profession in its different forms and guises in different parts of the United Kingdom—welcomes the main thrust of the Bill, although there are many issues which remain to be decided. I believe that the principle of independent regulation is right because it provides reassurance and underlines the importance of the perception of the independence of not only investigation but also regulation and standard setting.
    In the Second Reading debate, in referring to the reasons for introducing the Bill, the Minister very helpfully said that two of the key principles were,
    "the perception of independence from the accountancy profession".—[Official Report, 8/1/04; col. 259]—
    that is, the perception of independence of the supervisory regulatory bodies—and, secondly, the simplification of the regulatory structure. With regard to the second point, I am bound to say that few can

    GC 19
    argue—the noble Lord, Lord Borrie, above all, has more experience of the various structures than all of us around the table—that with the Bill we have made a major step forward in terms of simplification. In the application of the responsibilities of the individual bodies, as my noble friend Lord Hodgson said, the devil is in the detail.
    The central point that I wish to put to the Minister—it runs through a number of amendments to which I may not need to speak—is the importance of ensuring a spirit of partnership and co-operation between the supervisory and regulatory bodies set up under the aegis of this legislation and the profession. I know that that is intended, but when we talk about the perception of independence, primarily from the standpoint of—dare one say it?—the SEC and that of bodies abroad, it is also important to bear in mind the perception towards the legislation of the professionals in this country.
    Therefore, I rather hope that the Minister will commence this Committee proceeding by underlining what I know he believes in—that is, a spirit of partnership and co-operation with the accountancy profession. There are a number of examples to which we shall come. On the face of it, Amendment No. 8 does not appear to be hugely important, but it is important to the profession to signify that there is at least a perception of possible co-operation. I appreciate that when one reads something cold, it can sometimes connote an attitude that was not necessarily meant to be conveyed. However, the Minister will remember his very helpful comment at col. 260 of the Official Report, when he said:
    "The professional accountancy bodies that are recognised to supervise auditors will have to sign up to such standards and arrangements".—[Official Report, 8/1/04; col. 260.]
    One can read that both ways; perhaps it is correct in a legalistic sense. But, again, I would cite that as evidence of a possible perception in the profession that it is a "take it or leave it" approach.
    Another example is the compulsory levy in Clause 17. I appreciate that those are reserve powers. As my noble friend Lord Hodgson said, the two investigatory bodies—the Audit Inspection Unit and the Quality Assurance Directorate, which is run by the professions—will need to co-operate. It is important that there is seen to be a sense of co-operation and partnership at the outset.
    I conclude by agreeing with the Minister when he said on Second Reading that the accountancy profession has, by and large, maintained very high standards. I accept that the Government are right to take the initiative in pre-emptively setting out to avoid problems that could arise in this country by simplifying the procedure and giving new statutory responsibilities to the various bodies. But a signal from the Minister in this clause stand part debate might help accelerate and facilitate later debate.
    Lord Sharman: I, too, must declare an interest, and I should probably declare an advantage as well. I am the former chairman of KPMG International, and I
    GC 20
    lived through much of the negotiation and debate that resulted in the arrangements before us. I give a very strong welcome to the Bill—I think it is long overdue. It gives the desperately needed statutory backing to an independent system of regulation for which many of us have argued for some time. Public confidence in the accounting profession, however much it may be dented—and that is a matter of opinion—can help be restored only if we have transparent and clearly independent regulation.
    I reiterate what I said on Second Reading about the need for a complete overhaul. I endorse the comments of the noble Lord, Lord Hodgson. Trying to understand the effect of this Bill on legislation can, at times, be very difficult. We desperately need the companies' legislation to be completely overhauled.
    That having been said, I think it is as well to note that the Bill is welcomed by most in the accounting profession. You will never get 100 per cent support for something such as this. I look forward to the Minister's comments, which I hope will clarify the points made.
    Lord Borrie: I apologise as I was unable to attend the Second Reading debate. I had the benefit of reading what noble Lords who have spoken this afternoon said in that debate. I welcome the desire of the noble Lord, Lord Hodgson, to discuss whether Clause 1 should stand part of the Bill. I undoubtedly want it to stand part because I think that, along with Clause 2, it is absolutely fundamental. However, this gives us an opportunity, which noble Lords who have already spoken have taken, to make some general points about the scheme.
    The noble Lord, Lord Freeman, kindly suggested that I had some knowledge of this. He exaggerated, but I was the chairman of the Accountancy Foundation for a couple of years, which appears at the top left of the old regulatory structure. It was absorbed into the Financial Reporting Council almost a year ago, but it had achieved some things. It appointed a splendid range of people to form part of the review board, the Accountancy Investigation and Discipline Board, and so on. They were all appointed by the Accountancy Foundation, which was an independent body and had a majority in every case of independent people on it. Although I have not been able to find where it says so in the Bill, any more than has the noble Lord, Lord Hodgson, I assume and hope that the Minister can reassure us that there is no question but that appointments to all key bodies of the new statutory regime will ensure a majority of independent people.
    If I may make a somewhat controversial point in the presence of the noble Lord, Lord Sharman, and, for that matter, the other noble Lords who have spoken, one of the problems has been that the five accountancy bodies are often barely on speaking terms. If they are on speaking terms, they do not seem able to amalgamate, but seem to spend a lot of time at war with one another, as distinct from doing the best for their members in trying to ensure that they present a common front to the Government. That is a slightly facetious point. However, it has been unfortunate over

    GC 21
    the years that, although occasionally talks have taken place with a view to a merger or amalgamation, it has never happened. My experience of the Accountancy Foundation was that, when we wanted to talk to the accountancy bodies, we really had to talk to all of them all the time, and that that was not always easy. The pre-eminent body, if I may put it that way—the Institute of Chartered Accountants in England and Wales—had its magnificent building and its staff, while the others were not quite so well geared up.
    As the noble Lord, Lord Sharman, said, in this day and age when public confidence is so important and when we know what has happened at various accountancy firms, especially on the other side of the Atlantic, we must have firm public confidence in the auditing profession. Even if there had been an amalgamation of the various accountancy bodies, there would be a need in the public interest to have an injection of very strong majority—and I use the word as a generalisation—independent people on the various hoards, organising the arrangements that Clause 2 specifies. Some of those arrangements, such as auditing standards, are more obviously ones that the professional people themselves must initiate with a modicum of input from others. On the other hand, with investigation and discipline, especially in the so-called public interest cases, there should clearly be an injection of independent members.
    The development last year has resulted, after considerable discussion within the department and between the department and the profession, in what is now contained in Clauses 1 and 2, which are really the basics of the new structure and which are excellent. The phrase "co-operation and partnership" between the arrangements and the profession refers to something that can now be achieved. When I was chairman of the Accountancy Foundation, my dealings with the profession sometimes involved not co-operation and partnership but something of a war in order simply to get the minimum of finance that we felt was necessary to carry out the arrangements. Sometimes the verbal good will that was available from the profession was not backed up by money or real effort; it was half-inclined to admit that public interest required the new-fangled arrangements, but it was not all that pleased with them.
    Of course, the profession had to carry its membership and dun it for more money to run the scheme when subscriptions were going up anyway. There was that problem. However, I can see now, with the requirements of this Bill that put the arrangements on a statutory basis, that there is scope for the partnership and co-operation of which the noble Lord, Lord Sharman, spoke. I may sound patronising—and if so. I am sorry—but I believe that the profession is mature enough to be able to provide that co-operation and partnership from its side.
    4 p.m.
    Lord Sainsbury of Turville: Perhaps I, too, may use the clause to make one or two general points about the way we are approaching the Bill. I want to make it clear that the objective of the provisions is to protect
    GC 22
    and improve the quality of accounts and audit by ensuring that the audit profession is regulated in the most effective way. The role of independent auditors is extremely important in ensuring high standards of financial reporting. It is therefore important that the public can have confidence in their impartiality and effectiveness.
    When deciding whether to legislate, the Government recognise that action should be taken only where it is appropriate and that it should be proportionate. In particular, we took account of the fact that the review of the regulatory regime of the accountancy profession found no evidence that the current regulatory system was seriously flawed. We therefore have not tried to bring forward heavy-handed and disproportionate regulation but rather to concentrate on the concerns which the review found about the perceived independence of the key aspects of the current arrangements.
    This independence is important not just within the UK but internationally. I do not want UK auditors having to comply with onerous requirements of overseas regulators because those regulators do not believe they can rely on the independence of the UK regime. The provisions considered alongside the non-legislative action that has been taken will give the UK stronger, more independent and effective regulation without imposing disproportionate burdens on UK businesses.
    To take the point made by the noble Lord. Lord Freeman, we see a partnership and co-operation as being fundamental between the recognised supervisory bodies in this account and the regulatory framework. But that involvement, co-operation and partnership must in no way jeopardise the independence of the process. We will turn to the issue when we debate involvement, but if it jeopardises the independence, the whole point of a major part of the Bill is lost. Independence is central to what we are arguing here and is key.
    Clause 1 introduced additional requirements that professional accountancy bodies must meet in order to be recognised as supervisory bodies for auditors.
    Part 2 of Schedule 11 to the Companies Act 1989 sets out a number of requirements that professional accountancy bodies must meet in order to be recognised as supervisory bodies for auditors. These requirements cover both the rules that the body must have in place governing the eligibility of persons to seek appointment as company auditors and the conduct of company audit work.
    In its review of the regulation of the auditing and accountancy professions, the Government concluded it was desirable that the independent regulation and review of audit should be strengthened. Clause 1 therefore introduces new requirements for recognised supervisory bodies to participate in independent arrangements for setting audit standards in relation to

    GC 23
    both technical matters and to ethical matters relating to the integrity and independence of auditors; monitoring audits—
    The Deputy Chairman of Committees: There is a Division in the Chamber and the Committee stands adjourned for 10 minutes.
    [The Sitting was suspended for a Division in the House from 4.3 to 4.13 pm.]
    Lord Sainsbury of Turville: I was explaining that Clause 1 therefore introduces new requirements on recognised supervisory bodies to participate in independent arrangements. First for setting audit standards relating both to technical and ethical matters regarding the integrity and independence of auditors; secondly, monitoring audits of listed and other major companies; and, thirdly, investigating and disciplining auditors in relation to public interest cases.
    It may be helpful if I explain the fundamental structure of the Bill. I was distraughtar that to hear the noble Lord did not find ploughing through the initial clauses of the Bill to be a life-enhancing experience. Until I heard him speak I thought I had eventually got the matter clear. But let me see if I can explain. I refer to the chart he referred to, which I think is the only possible way for those who are not in the thick of it to understand what the new structure is and how it relates to the previous one.
    The key issue is the concept of the recognised supervisory bodies having funded arrangements with the regulatory structure, which has now been put in place and which involves the Financial Reporting Council and the boards which report. They are the Professional Oversight Board for Accountancy, the Accountancy Investigation and Discipline Board, the Auditing Practices Board, the Accounting Standards Board and the Financial Reporting Review Panel Ltd. That structure has essentially been put in place. It has a heavy independent element to it, which I think we all feel is right. The recognised supervisory body reaches a funding arrangement with the regulatory framework. In that way, we gain the necessary independence.
    Clause 2 sets out the criteria that those arrangements must meet, the main one being that they should be independent of the supervisory body. Together, these clauses strengthen the independence of the regulatory regime for auditors.
    The additional requirements introduced by this clause represent an important strengthening of the independence of the regulatory regime for auditors, especially in relation to large public interest companies. This increased independence is critical to rebuilding and maintaining market confidence in the reliability of the information on which investment decisions are based, a confidence that was badly knocked by the collapse of Enron and WorldCom. And it is essential that if the UK regulatory regime is to continue to match the best in the world.
    GC 24
    All the questions that we shall deal with later in the Bill—for example, involvement—relate to this central clause. It sets out the relationship between the registered statutory bodies and their funding arrangements with the regulatory framework. I hope that that is now a clear part of the Bill.
    4.15 p.m.
    Lord Hodgson of Astley Abbotts: It is a great relief when one finds that the noble Lords, Lord Borrie and Lord Sharman, and my noble friend Lord Freeman have similarly found the proposal within the clause not immediately clear. I can assure the noble Lord, Lord Borrie, that it was not our intention to blow a hole in the Bill by objecting to the Question that the clause shall stand part, but merely to debate and ventilate the issues.
    I accept the Minister's comment that we must demonstrate the independence of the UK's accountancy and auditing standards on an international stage and at an international level. I am also grateful to him for having read into the record the chart as best he can. That will help people because it is dry experience and difficult to tie the names of the real-life bodies to the clause.
    Clause 1 agreed to.
    Clause 2 [Arrangements to which additional requirements for recognition relate]:
    Lord Hodgson of Astley Abbotts moved Amendment No. 2:
    Page 3, line 33, leave out from "securities" to "or" in line 36 and insert "are a constituent of the FTSE-Actuaries 350 share index"
    The noble Lord said: We turn to the independent monitoring of audits of listed and other major companies. As we discussed during the previous debate, Clause 2 sets out the details of the arrangements for the extra supervisory duties which a recognised supervisory body must undertake independently. One of these, under new paragraph 19, is the independent monitoring of audits of listed and other major companies.
    The amendment queries the definition under paragraph 19(2)(a) of "major audit". Under that paragraph, the extra independent monitoring and inspection must be arranged by the recognised supervisory body for all company audit functions which its members carry out for companies "any" of whose securities are traded on the official list as defined by the Financial Services and Markets Act.
    Our query is the parameters that have been drawn in the definition of "major audit" in sub-paragraph (1)(a). It is worthwhile considering what companies would be covered. There are approximately 2,700 listed companies, of which 750 are on the alternative investment market—the AIM. It would be helpful to have the Minister's views on whether all of those are to be subject to additional independent monitoring. The official list excludes AIM companies—certainly from the point of view of tax laws and one's eligibility for capital gains tax relief.
    Perhaps while we are dealing with AIM we might also look at the still more junior market, OFEX, an unrecognised market. There is nevertheless a market, so will "listed" sweep up such companies? This is a probing amendment tabled for clarification and I hope that the Minister can shed some light on the matter.
    In the spirit of helpfulness, we want to offer an alternative because in no way do we want excessive regulation and supervision where it is not warranted. On that basis, we believe that in limiting "major audit" to the constituents of the FTSE 350 index, we would be striking a better balance. According to the Stock Exchange, the FTSE 350 index covers a significant percentage; that is, 96.5 per cent of the whole market capitalisation. At the same time, that would relieve the burden of further independent monitoring from the other 85 per cent of listed companies which are not in the FTSE 350.
    One final detailed point is that the clause as currently drafted refers to a company "any" of whose securities have been admitted to the official list. So if a company's ordinary shares were not listed but it had, say, a small issue of preference shares or debt securities which had been listed, would this require the independent monitoring of the company where the ordinary shares had not been listed? It would be worthwhile picking up that small point. I beg to move.
    Lord Sainsbury of Turville: The effect of these amendments would be to limit the required minimum scope of the independent monitoring arrangements to the audits of the FTSE 350 companies. The aim of the provisions in respect of monitoring Clause 2 is to strengthen the independence of a key aspect of the regulation of audit. We believe that this is necessary to rebuild confidence in the reliability of financial information provided by companies following the collapses of Enron and WorldCom.
    It is important that those carrying out the arrangements should focus their attention and resources in the areas in which an audit failure is likely to have the most significant adverse impact on the economy. However, I consider that the amendment goes too far in limiting the minimum requirement relating to the audits which would be the subject of independent monitoring under the arrangements. The effect of the provisions is to provide for the independent monitoring of particular audits. I believe it is right and that such a positive development should not be unduly restricted.
    I believe that if monitoring under the independent monitoring arrangements were limited to the FTSE top 350 listed companies, this would not provide the necessary degree of public reassurance that the audits of companies whose shares are publicly traded are subject to monitoring that is clearly independent of the recognised supervisory bodies. We are debating whether we limit this to the 350 FTSE companies, or take that up to the 1,200 companies which the provision, as drafted, would cover. It does not cover AIM, which is why the figure is 1,200 rather than over 2,000.
    GC 26
    It is also important to look at the international context where the independent oversight of audit firms, particularly those firms that audit companies whose securities trade in public markets has assumed greater importance than ever before. I believe that it is in all our interests to ensure that the UK remains at the forefront of best practice.
    That is particularly important in relation to the work we have been doing in partnership with the audit firms and with our European colleagues, and through the European Commission, to persuade the American regulators to adopt a pragmatic approach. It is important, not least to avoid unnecessary and overlapping regulation, that the US can rely to the maximum on our own regulatory systems. That is the stated intention of the new US Public Company Accounting Oversight Board. We believe that our comprehensive and high standard of regulation, supported and strengthened by the provisions of the Bill, should provide a basis for a sensible arrangement with the US.
    Lord Hodgson of Astley Abbotts: I am slightly disappointed. What we are trying to do is to get at the bulk of the area where the risk is. I am grateful to the Minister for his reassurance that AIM and OFEX will not be included. That is good news. I should like to readjust my figures, which I cannot do on my feet—my mental arithmetic is not good enough—to work out what proportion the 350 FTSE index represents of the 1,200 companies to which the Minister refers. I may return to the matter at a later stage to see whether I can persuade him that he is using a sledgehammer to crack a very small nut at the bottom end of the listed market. However, for the time being, I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Lord Hodgson of Astley Abbotts moved Amendment No. 3:
    Page 3, leave out lines 37 and 38.
    The noble Lord said: I shall speak to Amendments Nos. 3, 6 and 7. These focus on the second part of the "major audit" definition in new Part 3, paragraph 19 of Schedule 11 to the Companies Act 1989. At this stage this is merely a probing amendment. We do not wish necessarily to strike out a "public interest" test from the Bill, but we should like to hear some thoughts from the Minister about the drafting of this second criterion and the definition that has been adopted. We believe that it is fairly woolly and open to ambiguity.
    We are told that "major audit" also includes,
    "(b) any other company in whose financial condition there is a major public interest".
    What does that mean you may well ask? If you turn to paragraph 20(2) to seek clarification, the matter becomes even more opaque:
    "'public interest cases' means matters which raise or appear to raise important issues affecting the public interest".
    Frankly, this is a circular definition.
    The Minister will no doubt tell me that it is very hard to define public interest. I note, however, that in the Government's company law White Paper in 2002 there was a proposed criterion for public interest which was dependent on whether the company was public or private. For public companies the criteria proposed were two out of three of the following: turnover of more than £50 million, balance sheet total of more than £25 million, employees more than 50. For private companies the criteria proposed were two out of three of turnover of more than £500 million, balance sheet total of more than £250 million, employees more than 5,000. We do not advocate the use of these specific criteria in this clause but merely draw it to the Minister's attention in view of working along the same lines to define "public interest" in the Bill before us.
    It is not even clear from the drafting who will adjudicate which companies would fall into the category of "major audit" under sub-paragraph (2)(b) because their financial condition is of "major public interest". I presume this would be FRRP or other independent body charged with the independent monitoring of audits under paragraph 19, but it is by no means obvious from the drafting of the clause. Is there a right of appeal against independent monitoring if it is disputed that the company in question falls into that category?
    Amendment No. 6 is concerned with the phrase "or appear to raise": it suggests that a company might actually not raise issues affecting the public interest. In those circumstances a company might be classified as a major audit company for the purposes of paragraph 19, and therefore subject to independent monitoring and regulation, on the basis of a wrongly assumed public interest. Our amendment would leave out "or appear to raise": in the interests of tighter drafting we believe those words to be superfluous.
    Can the Minister give us some examples—perhaps his officials have prepared some examples—or criteria by which public interest can be judged? What are the "important issues" of public interest that the Minister envisages being covered by this definition? We are not quite sure of the drafting here and suggest "significant" as an alternative word as it is less subjective. Will there be some guidance provided for recognised supervisory bodies so that they know which companies' audits must be subject to independent monitoring under these provisions?
    At the moment we fear that the drafting in subparagraph (2) of paragraph 20 on page 4 is too open-ended and could be interpreted in a number of very different ways. There are a number of areas of law where public interest has been examined by the courts, the principal one that springs to mind being invasion of privacy cases and cases involving the press generally. Is it intended to look to these for guidelines? Or in the case of this particular legislation, is it purely financial as proposed in the company law review? We need some clarification on this definition. I beg to move.
    4.30 p.m.
    Lord Borrie: I am glad that the noble Lord, Lord Hodgson, has indicated that this is a probing amendment and that he does not actually want to get rid of the distinction between public interest cases and other cases. It would be unsuitable for the full panoply of public hearings and the full independent examination and investigation of discipline cases—for all matters of discipline of members of the accountancy professions—to come before this body. It would be overwhelmed with cases. But the public interest, as the noble Lord, Lord Sharman, and other noble Lords said in the earlier debate, arises from a number of situations in which confidence of the public is involved because auditing standards appear to have been breached. I refer especially to situations in which there is a suspicion of fraud, and that sort of thing. That must raise a question about something more than simply the relationship between the auditor and his company or, for that matter, the auditor and his professional body.
    I want to indicate two things. First, I know that it is difficult to define public interest. The Minister may be able to come much closer to what the noble Lord, Lord Hodgson, is seeking than I can. However, I hope that he does not suggest the possibility of companies being dealt with according to their size, where an arbitrary line is drawn, with public interest above and not below the line. That would be unwise. Secondly, with Amendment No. 6, the noble Lord wants to delete the words in lines 19 and 20 on page 4, "or appear to raise". It seems to me that, at the start of an investigation, it may not be clear whether public interest matters are involved; it may become clear during the course of an investigation that that is so. It would be a pity if it had to be absolutely clear that public interest was involved right at the very beginning of any disciplinary case.
    Lord Freeman: On a point of clarification and in an attempt to be helpful, will the Minister confirm that if it were decided not to proceed with an investigation because the judgment was that it was not of sufficient public interest, there could still be and might well be an investigation anyway, by the Quality Assurance Directorate? It is not a question of there being an investigation on that basis or no investigation at all; there is a continuum between the regulatory body, the AIU, and the QAD, which is a professional body that might consider issues that just fell outside the definition.
    Lord Evans of Temple Guiting: A number of interesting questions have been raised, which I shall try to answer.
    The aim of paragraphs 19 and 20 is to set out the minimum requirements for independent monitoring and disciplinary arrangements. That point has come through in some of the amendments that we have discussed already. As with some of the amendments that preceded them, the effect of the amendments would be to limit unduly the minimum application that monitoring and disciplinary arrangements would have to cover in order to be appropriate arrangements.

    GC 29
    Amendment No. 3 would limit the required scope of the monitoring arrangements to the audits of listed companies. It is right that those carrying out the monitoring arrangements should focus their attention on areas where audit failure is likely to have the most significant adverse impact, but I believe that the amendment limits the scope of the arrangements to too small a group. Audits of listed companies are, by nature of their listing, considered to be major. But it is not sensible to make listings the sole consideration of whether an audit is major. There are likely to be, and there are, other companies that are not listed but whose importance is such that their audits must also be considered as major. It would be wrong to exclude companies with large-scale operations, for example, just because they are not listed.
    The noble Lord, Lord Hodgson, raised the concern that the definition of "major audit" was too vague and could operate as a catch-all. The purpose of the provisions is to ensure that arrangements for independent monitoring have a minimum scope of application. The arrangements must enable the performance of audit functions in respect of major audits to be monitored. Audits conducted in respect of listed companies are, by virtue of the fact of their listings, considered to be major. However, listings cannot be the sole criterion of whether an audit is major or not. There are likely to be companies which are not listed but whose importance is such that their audits must be considered as major audits. Obviously, each case has to be considered in its own context, but I believe that it would be wrong, for example, to exclude companies with large-scale operations just because they were not listed.
    Amendments Nos. 6 and 7 would restrict the disciplinary cases that have, as a minimum, to be subject to independent scrutiny under the independent arrangements. Amendment No. 6 would only cover those cases where it was clear at the outset of a disciplinary case that public interest issues were involved. However, it is not always clear at the outset of a disciplinary case whether or not public interest issues are involved. This will sometimes only become clear once an initial investigation has been carried out.
    The effect of the amendment could be that cases involving the public interest—which should be dealt with by the independent investigation and disciplinary arrangements—were instead dealt with by the recognised supervisory bodies themselves, on the grounds that it was not clear from the outset that public interest issues were involved. We do not believe that this is right.
    In response to Amendment No. 7, it may be useful if I explain to noble Lords what we expect would constitute "public interest cases". We expect that public interest disciplinary cases would cover cases about the conduct or quality of audit work in respect of listed companies and other major companies. These are the most likely to raise important issues affecting the public interest. For example, we would expect the type of case that is currently dealt with by the accountants' joint disciplinary scheme—which has investigated such cases as Polly Peck International and
    GC 30
    Queens Moat Houses—could be covered by the independent disciplinary arrangements. Of course, whether any particular audit of such a company was actually covered would be likely to depend on the seriousness of the issues raised by the case. The noble Lord, Lord Hodgson, asked about the right of appeal. There will be provision in the A IDB scheme for this right.
    We want those carrying out independent disciplinary arrangements to focus their attention and resources on the areas in which a failure of the audit process is likely to have the most important adverse impact on the economy, both directly and through damage to market confidence, rather than covering all audit irregularities.
    I agree that it is important that there is certainty as to the scope of the independent monitoring and disciplinary arrangements. It will be for the person exercising the recognition function—in the first place, the Secretary of State and then, if the functions are delegated as proposed in Clause 3, the Professional Oversight Board for Accountancy—to be satisfied that the arrangements are capable of applying to all audits falling within this category.
    [The Sitting was suspended for a Division in the House from 4.39 to 4.49 p.m.]
    Lord Evans of Temple Guiting: If the arrangements satisfy the requirements in paragraphs 19 and 20—I hope that noble Lords will remember what the arrangements were—the subsequent question of whether particular cases fall within the scope of the arrangements will be a matter for the arrangements to determine, having regard to all the circumstances.
    It is already a statutory requirement that recognised supervisory bodies must have effective arrangements for the monitoring of audits and the investigation of complaints against company auditors registered with them. We are introducing a requirement for monitoring, investigation and discipline to be carried out independently—this afternoon we have all stressed and welcomed the notion of "independently"—of the supervisory body in public interest cases. We believe that that is right. The public should have confidence that seriously weak or corrupt auditing will be regulated firmly enough to create real deterrence.
    I shall now answer a number of the questions raised by noble Lords. The noble Lord, Lord Hodgson, suggested that the definition of "public interest" was circular. In fact, the definition of "public interest cases" in paragraph 20 at line 19 of page 4 applies to public interest cases under the independent investigation arrangements. It does not apply to the term "major public interest" in paragraph 19 at line 38 on page 3 of the Bill.
    The noble Lord, Lord Freeman, said that he understood that a disciplinary case that did not raise important issues of public interest might still be subject to disciplinary investigation and sanctions. That is correct. Such a case would not be handled by the independent arrangements but would be considered by the supervisory body's own disciplinary arrangements.

    GC 31
    On a point of detail, I should make clear that the FRRP will not carry out independent monitoring. Such monitoring is to be carried out by the Audit Inspection Unit, which will report to the Professional Oversight Board for Accountancy. The FRRP looks at accounts and not audits.
    Lord Sharman: Before the noble Lord sits down, in looking further at the matters raised by these amendments, which, as I read them, apply to companies and companies only, will he consider other entities which could be very clearly in the public interest but not qualify as companies? I have in mind large-scale partnerships, trusts and the like.
    Lord Evans of Temple Guiting: I am grateful to the noble Lord, Lord Sharman, for that question. The new legal requirement to sign up to independent monitoring applies only to companies because the Bill concerns companies and company auditors. However, the remit of the Financial Reporting Council Audit Inspection Unit, to which we expect the audit supervisory bodies to sign up, will in due course extend to the audits of large charities, major pension funds and other entities in whose financial condition there is a public interest.
    Therefore, although professional bodies will only have to sign up to independent inspection arrangements in respect of the audits of major companies, we anticipate that they will also agree to comply in respect of other major audits. I hope that that goes some way to reassuring the noble Lord, Lord Sharman.
    Lord Hodgson of Astley Abbotts: As I said when I began, this is a probing amendment and we accept the need for more listing of the criteria. The noble Lord, Lord Borrie, took issue with the words "appear to raise". I understand the force of his argument. The question is what constraints there are in those words and whether they can be used for fishing expeditions of one kind or another. Our purpose was to try to find a way to ensure some constraint on the Secretary of State's power or the bodies' power.
    I am grateful to the Minister for attempting to clarify some of the types of cases and I am grateful that there is an appeal procedure. My horse was slightly shot from under me because it never occurred to me that the concept of "public interest" at the bottom of page 3 was totally divorced from that of "public interest" half way down page 4 of the Bill. It seemed to me that, when used 10 lines apart, the words "public interest" might somehow be linked. But it was a very deft blow and my horse subsided beneath me. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    [Amendment No. 4 not moved.]
    Lord Hodgson of Astley Abbotts moved Amendment No. 5:
    Page 4, line 15, at end insert ", and
    (f) for ensuring that all defendants are properly represented"
    The noble Lord said: Amendment No. 5 focuses on the detail in new paragraph 20 in Clause 2—that is, the arrangements for independent investigation for disciplinary purposes of public interest cases. Here, it is proposed that disciplinary hearings as a result of independent investigations should be held in public by a person so designated by the supervisory body. That clearly brings an element of transparency, but we have a number of questions about the paragraph. How will the disciplinary hearings be conducted? Who will be the "designated person" whose role it is to adjudicate on the results of the investigation? And, if the hearings are to be held in public, might there not be some problems relating to confidentiality?
    In financial matters, issues of reputation and integrity are, quite rightly, paramount. When I was a member of the Securities and Futures Authority—one of the predecessor bodies of the Financial Services Authority—one concern was that disciplinary hearings held in public might have the effect of putting a person or firm out of business, even when found not guilty.
    Our amendment focuses on the legal requirements during the hearings. Obviously they will not be subject to the requirements of a judicial hearing under civil or criminal law, but will they, for example, be obliged to comply with the rights of the defendant in accordance with the ECHR—specifically Article 6—and the standards expected in a fair trial?
    It may be that a disciplinary hearing will expose the fact that a law has been broken or contravened. In such a scenario, the defendant could subsequently find himself in court. It would be very detrimental to fail to have, from the start, any clear structure which guaranteed the rights of the defendant in the initial disciplinary hearing in view of the fact that any further prosecution could use evidence from the conduct of the defendant in the disciplinary hearing—perhaps against him.
    We have no idea here of the structure of the hearing—that is, whether it will follow a standard format or whether the defendant will be allowed legal representation, and so on. We are concerned that the hearings may be ad hoc and unstructured. What right of appeal will there be against the disciplinary action? I can see no mention of that. I appreciate that it would not be a legal hearing but rather an internal disciplinary matter. However, I believe that there is some call to regulate the form of the disciplinary hearings and to clarify what rights the defendants will have.
    For most defendants, it will, it is hoped, be the first occasion on which they appear before a tribunal of this type. It will be new and unfamiliar territory for them and there are important reputational, as well as legal, issues to be addressed. The amendment is designed to ensure that every defendant will have access to experienced advice and to those who will be able to advise him widely, for example, on the implications of new paragraph 20(1)(c) of Part 3 at line 7 on page 4,

    GC 33
    which concerns the interests of justice and the implications for public hearings. We believe that that would be a useful safeguard. I beg to move.
    Lord Sainsbury of Turville: There are two issues here. One concerns the question of representation and the other the question of open disciplinary hearings. With regard to the first point, I believe it is right that defendants should have legal representation where appropriate. However, the aim of new paragraph 20(1) is to set out the minimum requirements for appropriate independent disciplinary arrangements. Those cover what we see as the most important elements of such arrangements: the functions of the arrangements, their transparency and their independence. The functions of the arrangements are set out as: the investigation of public interest audit cases; the holding of disciplinary hearings where it is considered desirable; and the taking of decisions as to whether—and, if so, what—disciplinary action should be taken.
    I consider that the extent to which the independent arrangements should ensure that all defendants are properly represented is a more detailed requirement which is best left to the arrangements themselves rather than being prescribed in legislation. In deciding whether particular disciplinary arrangements are "appropriate" for the purposes of new paragraph 20. the person exercising the recognition function will need to consider all aspects of the disciplinary arrangements.
    The issue of representation of defendants is one aspect of the function set out in new paragraph 20(1)(b) relating to the holding of disciplinary hearings. If the disciplinary arrangements did not make any provision in respect of representation, for example. that might be a matter which would call into question whether in fact the disciplinary arrangements would be an appropriate arrangement.
    Here we have an advantage because we already have the disciplinary scheme of the Accountancy Investigation and Discipline Board. That provides that a disciplinary tribunal may require the AIDB to meet the reasonable costs of a defendant's legal representation at a hearing if, taking into account all the circumstances, the absence of legal representation would be contrary to the rules of natural justice. The tribunal must conclude that it is not reasonable for a defendant to conduct his defence without legal representation—for example, because of the complexities of the issues involved—and that the defendant has established that he cannot afford and does not have adequate insurance cover for legal representation. So I believe that the point is covered through the disciplinary scheme of the Accountancy Investigation and Discipline Board.
    The second point relates to open disciplinary hearings. The requirement in the Bill for open hearings reflects an important principle of the strengthening of the regulatory regime. As the Government's review of the regulatory regime of the accountancy profession concluded, there is a need for greater transparency in terms of the clarity of the regulatory structures and the
    GC 34
    openness of decision making. The requirement for open hearings is consistent with the requirement of Article 6(1) of ECHR, that a person is entitled to a "fair and public hearing" in the determination of his or her "civil rights and obligations". I take on board the basic point of the amendment that there should be consideration that everyone is properly represented. I do not believe that such a provision needs to be put into the Bill as it has been taken account of already in the disciplinary scheme that I have mentioned.
    5 p.m.
    Lord Hodgson of Astley Abbotts: For a moment I thought that the Minister was accepting the logic of my argument and therefore the amendment. The AIDB will not be a statutory body; it will remain a self-regulatory body. It may have appropriate arrangements for carrying out the cases that meet the force of the amendment that we have tabled, but there is no statutory certainty that that will necessarily continue into the future. The way in which the Minister addressed the amendment means that he sees the force of it. I am unsure whether the AIDB example is a good reason to refuse it. However, we shall return to the matter when I have had a chance to read what the Minister said in more detail. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    [Amendments Nos. 6 and 7 not moved.]
    Lord Hodgson of Astley Abbotts moved Amendment No. 8:
    Page 4, line 30, after "no" insert "right to"
    The noble Lord said: We now come to supplementary arrangements to operate independently of body—not of "a body" or "the body", but of "body". During meetings with the Institute of Chartered Accountants in England and Wales this matter has also been brought to our attention. We are fully supportive of the concept of an independent body acting entirely independently. However, as presently drafted, this clause could be construed as precluding any form of consultation with the accountancy bodies on important matters.
    It is crucial that it be recognised that independence is not compromised by consultation. Indeed, the arrangements will have a much better prospect of operating successfully if the new bodies have the opportunity to avail themselves of the knowledge and experience of those who have previously been responsible for those important regulatory and disciplinary matters, and who still have regulatory responsibility as recognised supervisory bodies
    Although we recognise a purpose for the provision—which as the Minister has said is to satisfy other bodies in the United States and the European Union of the independence of UK regulatory arrangements—in its current form it does not reflect the intertwined powers and responsibilities that arise as a necessary consequence of the new UK regime which draws on existing statute, Royal Charters and bye-laws. As such, it risks making the complex regulatory and disciplinary framework unworkable.
    In particular, there is a danger that problems of enforceability against members and member firms of accountancy bodies will arise if paragraph 21(2) is misconstrued as enabling the new disciplinary body to impose on members of a supervisory body a disciplinary scheme that has not been approved through the constitutional arrangements under which the bodies operate; namely, a Royal Charter and bye-laws approved by the Privy Council. The AIDB draws its powers from those bodies that have agreed to participate. We entirely accept that the professional bodies that participate in the AIDB scheme should not have any involvement in the way in which the investigations and the holding of hearings are carried out.
    Turning now to our concerns about the detailed drafting of this part of the clause when applied to the Audit Inspection Unit (AIU), the AIU will need to work closely with the inspection and monitoring arm of the Quality Assurance Directorate, to which my noble friend Lord Freeman referred. While the AIU will have responsibility for major listed company audits, the RSBs will retain responsibility for the rest. That means that the AIU will inspect 50 or so audit firms, but the QAD will still have the remaining 6,000 plus firms to inspect and to monitor.
    The QAD also runs a desk-top monitoring service which considers annual returns from firms registered with the institute, press articles and input from elsewhere in the institute and from outside in order to run the risk-based monitoring system. That work will be made available to the AIU for the firms that it is involved in monitoring so that it can draw up its own risk-based inspection programme.
    As the QAD is responsible for the non-listed company audits, there may be some instances in which both inspectorates will need to co-ordinate their visits to firms to ensure efficiency on site. After a visit, the two inspectorates will present reports together to the audit registration committees of the relevant chartered institutes.
    That level of co-operation is essential for the smooth running of the new system. If the present drafting of paragraph 21(2)(b) is interpreted as prohibiting such co-operation, that would be most unhelpful and interfere with the effectiveness of the inspection regime. The amendment that we propose would provide a solution to that problem. It runs along the comments made by several noble Lords, including my noble friend Lord Freeman, that relate to the need for smooth co-operation in the future and for people not to get on their high horses. I beg to move.
    Lord Sharman: My name is attached to this amendment. I totally support the arguments made by the noble Lord, Lord Hodgson. I shall not delay the Committee longer by repeating them. Suffice it to say that I believe there are five key points that we need to ensure are put in place in the working of this regime. First, there must be no preclusion of consultation with the accountancy bodies. That simply will not work. Secondly, it must be recognised that independence is
    GC 36
    not compromised by consultation. Thirdly, we must ensure that whatever results is enforceable. We cannot allow ourselves to get away from that. Fourthly, we entirely accept that professional bodies should not have any involvement in the way in which the investigations are carried out. Fifthly, to reinforce the words of the noble Lord, Lord Hodgson, anything that precludes the AIU and the QAD working closely together and effectively will be a poor result in terms of the effectiveness of the Bill.
    Lord Borrie: The noble Lord, Lord Sharman, has said that he agrees with the government arrangements that there should be no interference by other professional bodies in the way in which the proceedings are carried forward. There must be no involvement. Inserting "no right to" before the word "involvement" suggests to me that while there is no right, none the less one could have or could be allowed to have an involvement. That would appear to apply also to the appointment of members which would be most unfortunate.
    Lord Evans of Temple Guiting: Perhaps I can repeat a point made by my noble friend Lord Sainsbury at the beginning of these proceedings; that we want consultation, that we believe in consultation and that we believe that consultation is of tremendous importance. Now that we have both made that statement I hope that it will reassure professional accountancy bodies.
    I emphasise that the aim of this provision is not to prevent the recognised supervisory bodies from having any input at all into the work that will be carried out by the independent standards setting, monitoring and disciplinary arrangements, where that is appropriate. The recognised supervisory bodies, for example, will be able to comment on draft auditing standards prepared by the independent standards setter. However, they would not be able to take part in the decision making of what should constitute the final standard to be issued.
    I believe that this amendment carries the potential to weaken significantly the requirement for independence. One can envisage a future situation in which a supervisory body chose to participate in standard setting, monitoring or disciplinary arrangements under which, by informal practice with the body running the arrangement, the supervisory body was closely involved with the core business and decision making in those areas. As long as that was by informal practice and the supervisory body had no right to such involvement, we consider that, if the amendment were accepted, the person exercising the recognition function could regard the arrangements as satisfying the independence requirements. I do not consider that that would be desirable.
    The aim of new paragraph 21 is as set out in the heading; namely, to ensure that the arrangements "operate independently" of the supervisory bodies. There are two general ways that supervisory bodies can be involved in the arrangements. The first is that they are involved in the choice of who carries out the

    GC 37
    functions. That is prevented by paragraph 21(2)(a). The second is that they are actually involved in the operation of the functions. That is prevented by paragraph 21(2)(b). We believe that it is necessary to prevent both kinds of involvement in order to ensure real independence of regulation.
    Paragraph 21(2)(a) and (b) apply only for the purposes set out in paragraph 21(1); that is, for ensuring that the following activities are done independently of the supervisory bodies: the determination of technical audit standards and audit standards relating to professional integrity and independence; the carrying out of monitoring and inspections in respect of major audits; and the carrying out of disciplinary investigations, hearings of disciplinary cases and the taking of disciplinary decisions.
    The noble Lord, Lord Hodgson, raised whether the RSBs' monitoring arrangements would be prevented from working with the independent monitoring arrangements. We are keen that the recognised supervisory bodies' monitoring arrangements in respect of non-major audits should work closely together with the new independent monitoring arrangements for major audits, both to share experience and to ensure that monitoring regimes operate seamlessly. The provisions would not prevent the bodies' monitoring arrangements providing information on the audit firms to be visited, nor would it prevent the co-ordination of on-site inspection of firms. We believe that it is important that we have a balance between allowing a sensible operational interface between the arrangements while at the same time ensuring that the new monitoring arrangements are carried out independently.
    The noble Lord, Lord Hodgson, also asked whether that would stop the RSBs from agreeing to rules of the AIDB scheme and any changes to those rules. As far as the AIDB is concerned, new paragraph 21(2)(b) means that recognised supervisory bodies may not have any involvement in the way in which the scheme operates in general. That would include matters such as the carrying out of investigations and the holding of hearings.
    However, it will be the responsibility of each recognised supervisory body to satisfy itself that the arrangements in which it proposes to participate in order to meet the new recognition requirement introduced by Clause 1(5) of the Bill actually meet the criteria set out at new paragraph 20(1). So the decision on whether to sign up to the AIDB scheme, and to delegate to it the disciplinary powers that the AIDB needs so that the AIDB tribunals can impose sanctions directly on the body's members as required at paragraph 12A(1)(b), rests with each body. Similarly, if the rules of the scheme change, it is the responsibility of the body to satisfy itself that the new rules still enable the scheme to meet the criteria in new paragraph 20(1) and the decision on whether to continue to participate in the scheme under the new rules rests with the body.
    GC 38
    The provision at new paragraph 21(2)(b) is intended to assure the operational independence of the investigation and disciplinary arrangements. It is not intended to affect those decisions that the supervisory bodies must take and we do not think that it could be interpreted as having such an effect.
    5.15 p.m.
    Lord Hodgson of Astley Abbotts: That is a very thorough and complex answer which will require careful study. The phrase in new paragraph 21 is that,
    "the body has no involvement in".
    The words "no involvement in" can be interpreted as "cannot have an involvement in" or "must not have an involvement in". That cuts across the issue that we were trying to raise about it being permissive as opposed to exclusive. We felt that it was drafted exclusively and therefore cut across an issue that the noble Lord, Lord Sainsbury, raised earlier, when he said he wanted to encourage co-operation going forward. By saying "no right to" we were trying to make it clear that the body had no right to involvement but could be involved. I believe on this issue we should read what the Minister has said.
    Lord Freeman: Before my noble friend withdraws his amendment, perhaps he would agree that further thought is genuinely required on this point. It may appear to the Government to be a minor point, but it is symbolic of the issues to which my noble friend Lord Hodgson and the noble Lord, Lord Sharman, referred earlier. I would be grateful to my noble friend Lord Hodgson, in considering how to proceed, if he considered the two issues about which there is surely no dispute in the profession: that there should be no involvement in decision making or implementation of decisions. There was no discussion about those two matters. Surely, as my noble friend Lord Hodgson said, to rule consultation out implicitly seems to be throwing the baby out with the bath water.
    Lord Hodgson of Astley Abbotts: I am grateful to my noble friend. He has put the matter very elegantly. I shall withdraw the amendment at this stage, but I hope that the Minister will give it further thought to ensure that we do not cut across the matter. There is no disagreement about the need for collaboration, but that we are not doing it inadvertently. A view outside the Committee is that there is a danger that we certainly may be doing that.
    Lord Evans of Temple Guiting: Perhaps I may return to another point that my noble friend Lord Sainsbury made earlier, that we shall consider anything that is said this afternoon. The noble Lord, Lord Freeman, has made a very interesting point that we would like to consider and return to later.
    Lord Hodgson of Astley Abbotts: I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 9:
    Page 4, line 32, leave out second "or"
    The noble Lord said: On page 4 we drop down a couple of lines for the next two amendments. They take us to new paragraph 21(2)(a) and (b) to which the Minister referred in answering the previous group of amendments. This amendment focuses on the supplementary paragraph defining "independence" for the purposes of new paragraphs 17(b), 18(b), 19(1)(6) and 20(1)(e).
    Amendment No. 9 asks the Government to explain what is covered by subparagraph (b). The Minister touched on this matter when replying to the previous group of amendments, but I believe that it is worth addressing the matter on its own. What does the phrase "other respects" in line 33 cover in regard to independent monitoring? It would be helpful if the Minister put on the record some examples of where the arrangements of a recognised supervisory body would or would not comply with sub-paragraph (b).
    This seems, as currently drafted, a pretty broad and open-ended provision. It would be better, however, if we could have some idea of the interferences envisaged that would make it necessary. Unless the Minister can give us some examples of the difficulties that the provision seeks to address, it seems an unnecessary addition to the Bill and another potential barnacle to avoid.
    Amendment No. 10 is designed to probe the drafting. Arrangements are not to be regarded as independent unless they are designed to ensure that the body has no involvement in,
    "(a) the appointment or selection of any of the persons who are to be responsible for doing the thing or things in question, or
    (b) the way in which the arrangements operate in other respects".
    If the Minister can justify the inclusion of paragraph (b), surely both options should be covered. We do not see that the two sub-paragraphs are mutually exclusive. In order to meet the required standards of "independence", the recognised supervisory body should be removed from both the appointment and selection process and—not or—any other arrangements.
    I look to hearing how the Minister intends these independent arrangements to work. We want to ensure that the legislation is as clear as possible, given the general background, for those bodies which have to work with and abide by it. We want the provisions to be workable, practical and unambiguous, and I am not sure whether paragraph 21 achieves that aim. I beg to move.
    Lord Borrie: I am surprised by the noble Lord's interpretation. Why does it not mean either (a) or (b)?
    Lord Hodgson of Astley Abbotts: Quite simply, we thought it should be both. It should cover both cases—
    GC 40
    it should not be a question of "or". If these arrangements are operating independently, it should cover both of them.
    Lord Borrie: It will.
    Lord Evans of Temple Guiting: The aim of Clause 2 is to ensure that the standard setting, monitoring and disciplinary arrangements are independent of the recognised supervisory bodies. Making the regulation of auditors more independent is the primary purpose of Clauses 1 and 2, and paragraph 21(2) is central to this.
    We have defined "independence" in new paragraph 21(2) in terms of preventing the "involvement" of the recognised supervisory bodies. I should say again that this will be a matter for the person exercising the recognition function to decide, in the light of all the facts, whether or not a recognised supervisory body is actually "involved" in any of the arrangements. It may be helpful if I say a few words about what I mean by this.
    In the previous amendment, I gave assurances on co-operation and discussion, although I said that the bodies in question would not be able to take part in decision-making on what should constitute the final standard to be issued. Although it is not entirely analogous, it might be helpful if I offer a parallel example.
    When taking a car to the garage for its annual MOT, if it is three years' old, a customer would expect to be able to have an input and influence the service received—for example, when the car will be ready for collection and whether any other additional services should be performed at the same time. But customers are not involved in carrying out the actual work, nor are they involved in the final decision on whether the car is roadworthy. That is the sort of distinction we are aiming to draw with these provisions.
    As I mentioned before, it will be for the person exercising the recognition function—the Secretary of State or, if the functions are delegated under Clause 3, the Professional Oversight Board for Accountancy—to decide whether the way in which the independent arrangements operate in practice is such that in fact they operate independently within the terms of this provision.
    The noble Lord, Lord Hodgson, asked what new paragraph 21(2)(b) on page 4, line 33, actually meant. The aim of new paragraph 21 is as set out in the heading; namely, to ensure that the arrangements "operate independently" of the supervisory bodies. There are two general ways in which supervisory bodies can be involved in the arrangements. The first is that they are involved in the choice of who carries out the functions, which is prevented by paragraph 21(2)(a). The second is that they are actually involved in the operation of the functions, which is prevented by paragraph 21(2)(b). We believe that it is necessary to prevent both kinds of involvement—therefore, (a) and (b)—in order to ensure real independence of regulation.

    GC 43
    ensuring that failure by a recognised supervisory body to pay the appropriate costs is, in itself, a breach of the recognition requirements. The requirement could be enforced by the person exercising the recognition function seeking a compliance order from the court and, ultimately, by revoking recognition. This is an important provision that removes any possible perception of a risk that a supervisory body could seek to wield undue influence over the arrangements by withholding payment or threatening to do so. I believe that the proposed amendment would weaken the provision unacceptably.
    It is not the case, however, that the recognised supervisory bodies would automatically have to bear 100 per cent of the costs of the standard setting, monitoring and disciplinary arrangements. That is not what new paragraph 22(1) provides. The key phrase in this provision is,
    "in the event of their providing for the … costs of maintaining the arrangements".
    We anticipate that the recognised supervisory bodies will comply with the requirements in Clause 1 by following the standard setting, monitoring and disciplinary arrangements set up under the new FRC; that is, the Auditing Practices Board, the new Audit Inspection Unit of the Professional Oversight Board for Accountancy and the Accountancy Investigation and Discipline Board. Noble Lords may find it useful if I set out the arrangements for the costs of maintaining those bodies.
    The generality of the FRC's costs will continue to be met through the existing tripartite funding regime, under which government, business and the accountancy profession each hear one-third of the costs. The standard setting arrangements of the Auditing Practices Board provide for funding to be met through the tripartite regime. The funding arrangements are, however, different in respect of monitoring (the new Audit Inspection Unit) and discipline (the Accountancy Investigation and Discipline Board). For both functions, the core running costs are funded on the tripartite basis I have just outlined.
    However, all the case costs of the monitoring function and the disciplinary function will fall to be paid by the accountancy profession. This is what the arrangements provide for and, under new paragraph 22(1), it is therefore what the recognised supervisory bodies would be obliged to pay in order to meet the recognition requirement of participation in an appropriate funded arrangement.
    We are strongly committed to the principle of the tripartite funding arrangement under which government, business and the profession each bear one-third of the core costs of the FRC. We have made our commitment plain in the Review of the Regulatory Regime of the Accountancy Profession and in the Statement I made to the House on 29 January last year. I reaffirm the commitment that we made then. The reason we have put Clause 16 into the Bill is to enable government to fulfil their part of this commitment. The levy point of course only comes in in
    GC 44
    a situation where this arrangement essentially breaks down. But as we see the matter, this is the commitment we are making.
    5.45 p.m.
    Lord Hodgson of Astley Abbotts: I am grateful to the Minister. We have heard enough about his commitment to the tripartite arrangement continuing, about core costs and the FRC being funded in that way. I am happy to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Clause 2 agreed to.
    Clause 3 [Delegation of functions by Secretary of State to new or existing body]:
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 12:
    Page 5, line 26, at end insert—
    "( ) Schedule 13 to the Companies Act 1989 (c. 40) (supplementary provisions with respect to delegation order) is amended as follows.
    ( ) For paragraph 3(2) and (3) substitute—
    "(2) The body shall consist of such persons as the Secretary of State may appoint after such consultation as he thinks appropriate, provided that—

    (a) not less than eight people are appointed;

    (b) a minimum of three are individuals who hold a qualification from one of the bodies recognised by the Secretary of State as offering a recognised professional qualification;

    (c) a majority of those appointed are non-executive members;

    (d) the appointments for office are for a period of three years and for two further three year periods if subsequently reappointed; and

    (e) the chairman of the body shall be such person as the Secretary of State may appoint from amongst its members.

    (3) The Secretary of State must secure that a committee of the body, consisting solely of the non-executive members, is set up and maintained for the purposes of discharging the functions set out in subsection (4).
    (4) The functions of the non-executive committee are to issue rules for the identification and disclosure of conflicts of interest in a form which is satisfactory to the Secretary of State.""
    The noble Lord said: Clause 3 deals with the delegation of functions by the Secretary of State to a new or existing body. In moving Amendment No. 12, I shall speak also to Amendment No. 18. The amendments focus on the changes made by Clauses 3 to 5 to Section 46 and Schedule 3 to the 1989 Act. I shall put forward our general comments in a minute when I speak to the Question of whether Clause 3 stands part.
    I refer now to Amendment No. 12 which seeks to substitute for paragraphs 3(2) and (3) in Schedule 12 a more detailed set of provisions for the constitution of the delegated body under Section 46. Amendment No. 18 is merely a consequential amendment that makes the necessary changes to Clause 5.
    In the Companies Act 1989 there is a power for the Secretary of State to establish a body corporate to exercise powers in relation to company auditors and the recognition of supervisory bodies. Schedule 13,
    Paragraph 21(2)(a) and (b) apply only for the purposes set out in paragraph 21(1)—that is, for ensuring that the following activities are done independently of the supervisory bodies: the determination of technical audit standards and audit standards relating to professional integrity and independence; the carrying out of monitoring and inspections in respect of major audits; and the carrying out of disciplinary investigations, hearing of disciplinary cases and the taking of disciplinary decisions.
    Perhaps I can quickly raise an issue that has not been raised but that, given that we are trying to reassure the profession and accountancy bodies, may be helpful. That is the question of whether this will prevent the accountancy bodies providing secondees to the FRC. The answer is "no". We see benefit in some degree of interchange, for example between the staff of the new inspection unit and the very experienced staff who have been carrying out inspections under existing arrangements. But it is important that it should be the people operating the arrangements, and not the accountancy bodies, who decide whether a secondee should be used and select that secondee, and that the body should not be involved in the decision. That is achieved by paragraph 21(2)(a). The aim of new paragraph 21(2)(b) is to preclude arrangements where the bodies had any part in the functioning of the arrangements. It would not preclude arrangements to which bodies had seconded staff, for example. The mere presence of seconded staff would not in itself deprive the arrangements of their independence, because it would not necessarily mean that the bodies had any part in the functioning of the arrangements.
    Lord Hodgson of Astley Abbotts: I think that I have grasped what he is getting at, and grasped the significance of it. I hope that he will not think me unduly cheeky but, when he said how important it was that both (a) and (b) applied, he did not say (a) or (b). However, I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    [Amendment No. 10 not moved.]
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 11:
    Page 4, line 41, after first "of" insert "a fair proportion of the"
    The noble Lord said: We come to the next part of page 4, which is on supplementary funded arrangements, focusing on the funding for the new arrangements set out in paragraphs 17 to 20, in which the supervisory bodies are now required to participate. We have had representations from members of the profession on the issue; they have commented that they are entirely willing to participate in the new arrangements and contribute to the funding but believe that there should be some measure to allow them to bear an appropriate proportion of the cost rather than, as the drafting currently suggests, that they could end up paying all of it.
    Paragraph 22(1) implies that the supervisory bodies will pay 100 per cent of the costs of standard setting relating to integrity, independence and technical
    GC 42
    standards; independent monitoring of audits of listed companies; and independent investigation for disciplinary purposes of public interest cases. Paragraph 22(2) extends the supervisory bodies' funding responsibilities so that they are not confined to the activities for which they are a supervisory body.
    I believe that I have got it right in saying that the agreement with the Government currently is for the basic cost to be funded in three equal parts by the Government, business and the profession as a whole, not just by recognised supervisory bodies, through the Consultative Committee of Accountancy Bodies. Those tripartite arrangements should be reflected in the new arrangements proposed in the Bill, or at least the Minister should give an undertaking on the record today. Therefore we wish to insert the words,
    "a fair proportion of the",
    to give effect to that. I beg to move.
    Lord Sharman: My name is attached to the amendment. I support what the noble Lord, Lord Hodgson, has said. I remind the Minister of what I said at Second Reading.
    [The Sitting was suspended for a Division in the House from 5.29 to 5.39 p.m.]
    Lord Sharman: I think I had reached my Second Reading remarks. As I said at Second Reading, it has always been my understanding that the basis on which these arrangements would go forward would be what I would call the third formula. I believe that it is very important that the formula is reconfirmed so that we do not find one body with an interest in this bearing all the costs.
    Lord Borrie: I express the hope that the Minister in giving his reply will make reference to paragraph 19 of the Explanatory Notes. It is probably my fault, but I cannot find the provisions referred to in the first sentence—that,
    "provisions would … enable the Secretary of State to impose a levy on bodies or persons".
    I thought and hoped that "on … persons" means—I do not suppose that the noble Lord, Lord Sharman, would agree with me—individual members of the professions as distinct from the professional bodies. I say that partly because of a comment I made during my early remarks this afternoon, that when I was chairman of the Accountancy Foundation we had tremendous difficulty getting adequate funds out of the professional bodies. They gave all sorts of reasons for the difficulties. It occurred to me—but of course it would be possible only under a statutory scheme—that a levy on individual members of the professions might be a way of helping. Perhaps I have missed or lost something because I cannot find whether the Secretary of State has such a power under the Bill.
    Lord Sainsbury of Turville: I can give the assurance that noble Lords are looking for as to how we intend to take the issue forward. The purpose of new paragraph 22(1) is to assure the independence of the standard setting, monitoring and disciplinary arrangements by

    GC 45
    which sets out supplementary provisions relating to the delegation of these functions, has little in the way of detail. The powers which it will take on are of considerable importance, particularly given the changes envisaged with the alterations brought forward by the Bill and with the reorganisation of the FRC and its subsidiary bodies.
    We understand from the Explanatory Notes that the body which will be granted delegated powers under Clauses 1 to 5 is likely to be POBA—the Professional Oversight Board for Accountancy. That is, as I understand it, a new body which takes on some of the old responsibility of the review board and is designed to provide a statutory oversight of self-regulation for the accountancy profession.
    Our amendment seeks to probe the set up of this new body. Paragraph 3 of Schedule 13 to the Companies Act 1989 currently gives scarce detail, save the requirement that the body must have a minimum of eight members. We believe that this meagre outline should be enlarged upon and not left to the whim of the Secretary of State, whoever he or she may be in the future. It is old drafting and not in line with modern practice. There is, in primary legislation, ample precedent for having a fuller specification for the constitution of a new regulatory body, including provision for non-executive members and a non-executive sub-committee. We have borrowed a considerable amount of our wording from Schedule 1 to the Financial Services and Markets Act 2000. This schedule details the workings of the Financial Services Authority as established by that Act.
    I shall briefly run through what we believe to be the key requirements for POBA or whatever other body might be delegated, having fulfilled the delegation requirements. We have retained the two requirements already present in the existing legislation in paragraphs 2(2) and 2(3)—that is, that the Secretary of State may appoint such persons as he thinks fit after such consultation as he thinks appropriate and that he must appoint at least eight persons.
    We have, however, gone further in providing detailed provisions for the body. First, we state that a minimum of three should be individuals who hold a qualification from one of the bodies recognised by the Secretary of State as offering a recognised professional qualification. We think that this is an important safeguard. Since this body is intended to regulate the auditing and accountancy profession, we need to be sure that there are at least three qualified accountants serving on the body. They will have the personal knowledge and professional experience of the auditing business. Our requirement for three is merely a probing figure—we thought it important that there should be some statutory requirement for a certain number of qualified members on the body.
    Paragraph (2)(c) of our amendment states that a majority of those appointed should be non-executive. With this provision, we have borrowed from the drafting of Schedule 1 to the Financial Services and Markets Act where special provisions are laid out in paragraph 3 for non-executive members of the
    GC 46
    governing body. If the FSA is to have a majority of non-executives, the same principle should hold good for this regulatory body. FSMA requires the non-executive members of the FSA board to form a committee for specific purposes, and again we have borrowed this wording for an identical provision in the Bill.
    In the case of the non-executive committee, which we propose, its functions would be to issue rules for the identification and disclosure of conflicts of interest in a form which is satisfactory to the Secretary of State. Conflicts of interest are a sensitive area in any business environment. When dealing with self-regulation and the monitoring of standards and good practice they are, of course, particularly significant. We would make it the duty of the non-executive committee of the body to set out clear rules on conflicts of interest for the benefit of the recognised supervisory bodies and under the eye of the Secretary of State. The Minister may tell us that this will already be within the remit of the delegated body—POBA However, we think that conflicts of interest are of particular importance and warrant inclusion in the schedule to the 1989 Act; and our amendment would fulfil that aim.
    Our last two paragraphs set out the terms of appointment for members of the regulatory body. Appointments should be on the basis of a three-year term, with, if re-appointed, a further two years. We are conscious here of the recommendation in the second Nolan committee report which stated that terms of office, which should be renewable, should not normally exceed four years and reappointment for third or subsequent terms should be the exception rather than the rule. Our amendment is in line with that principle: we stipulate a three-year term with two further three-year terms if reappointed.
    Finally, our amendment would give the Secretary of State the power to appoint the chairman from among the members of the body.
    The amendment is designed to elicit some details of the structure of the body which will receive delegated powers under these clauses. The Minister may not wish to have such details on the face of the Bill, but we think it advisable in light of the precedent of the FSA in the Financial Services and Markets Act. He will, however, be able to put on record how he believes the body will be structured and if it will differ from the structure we have proposed. I look forward in particular to hearing how the body will be composed, especially in relation to non-executives, who are an essential buttress to independence. I beg to move.
    Lord Sainsbury of Turville: I am afraid that the amendment would shoot a hole in the carefully constructed basis of the whole arrangement, which is that the Secretary of State will delegate her functions to the Professional Oversight Board for Accountancy. That is part of the agreed way forward on the whole issue. If the amendment were passed, she would not be able to do that. Let me explain why that is and therefore why we think the amendment should not be pressed.

    GC 47
    The basic policy aim behind Clauses 3 to 5 of the Bill is to implement the recommendation of the review of the regulatory regime of the accountancy profession that the Secretary of State's role in recognising supervisory bodies and qualifications should be delegated to an independent body, namely the successor of the review board.
    As the review acknowledged, the current delegation power in Section 46 of the Companies Act 1989 does not enable us to achieve this policy aim as it only permits delegation to a body created by the delegation order, not to an existing body. In the case of the Professional Oversight Board for Accountancy, we already have this body in existence. It is understandable that that was the case in the Companies Act 1989 because when that Act was drawn up there was no existing body to which the Secretary of State's functions could have been delegated.
    Although the Financial Reporting Council existed at that time, it did not have any remit in respect of audit regulation. That is hardly surprising, since audit was largely a self-regulated profession until the 1989 Act came into force.
    Clauses 3 to 5 therefore make technical changes to the 1989 Act to enable decisions on the recognition of supervisory bodies and audit qualifications to be taken by an existing body. However, different considerations apply when delegating statutory functions to an already existing body as opposed to setting up a body from scratch to delegate functions to. When setting up a body from scratch, of course you need to make provision for things like members, chairman, proceedings and so on. However, when faced with an existing body, the question is whether this body will exercise the functions effectively. If the answer is no, then the functions should not be delegated.
    New Section 46A(3)(a) of the Companies Act 1989 provides that the Secretary of State may delegate her functions to an existing body only if it appears to her that the functions will be exercised effectively. Clearly, if the Secretary of State had doubts for example about the suitability of the chairman or members of the body, she would not make the delegation order. It is not necessary to require her to appoint them.
    I consider that these amendments would hinder our policy aim, which is for the Secretary of State's function to be delegated to the Professional Oversight Board for Accountancy, provided it meets the requirements for delegation to be made to it. This would impede the realisation of synergies that would significantly improve the overall independence of the regime and the effectiveness of oversight of the supervisory bodies. I give the Committee two examples. The Professional Oversight Board for Accountancy does not comply with the criteria in the amendment. None of the members is appointed by the Secretary of State, and there is no committee with a remit set out in subsection (4) of the amendment.
    GC 48
    I point out finally that any delegation order is subject to affirmative resolution because we believe it is right that the House should have an opportunity to debate the precise nature of the functions to be transferred and the identity of a body to which they are to be transferred. So, there will be an opportunity to consider this. It is an essential feature of the scheme we put forward that delegation would be made to the Professional Oversight Board for Accountancy. That could not take place if the amendment was passed. That is probably not the noble Lord's intention in this particular case.
    Lord Hodgson of Astley Abbotts: It is not. As I understand it, the Minister says that the Secretary of State has a failsafe power because she does not delegate if she does not like the way the thing is organised. That is potentially difficult. Presumably the structure of the board to which delegation has taken place could subsequently alter after delegation has taken place. Delegation would be withdrawn in order to force the board to behave in the way that the Secretary of State felt would permit it to carry out its functions effectively.
    I find that a strange way to do things. It would be better to say, "This is how we want it done, in order for us to be able to make a delegation order effective", rather than to say, "We'll see what you have got to do and if we don't like what you are going to do, we will either not delegate you in the first place or remove your delegation order". That seems a clumsy way of doing things. Given the confusion in the drafting of the Bill, it may be that that is the only way it can be done. But it puts the Secretary of State, whoever he or she may be, into quite a difficult position of having to withdraw a delegation. That will cause quite a bit of difficulty if the delegated body were to be obstinate in the way it has organised itself.
    I accept what the Minister said about the affirmative statutory instrument, so that the House has a chance to look at what has been done before it happens. I wonder whether we have a rather clumsy approach, but maybe that is imposed on us by the way that the legislation is currently drafted. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    6 p.m.
    On Question, Whether Clause 3 shall stand part of the Bill?
    Lord Hodgson of Astley Abbotts: I rise to speak to Clause 3 on a probing basis again to have a similar discussion to that on Clause 1. We have some complicated amendments, substitutions and additions to the 1989 Act. Perhaps I could briefly set out for the Minister what I think the situation is to see whether I have correctly understood the point of Clauses 3 to 5, which hang together. These clauses are inextricably intertwined so I hope the Minister will forgive me if I stray slightly beyond the provisions of Clause 3.

    GC 49
    The Explanatory Notes tell us that the point of Clauses 3 to 5 is to extend the provisions already set out in Section 46 and Schedule 13 to the Bill, which deal with establishing a body to carry out functions delegated by the Secretary of State to do with the regulation of auditors. Section 46 allows the Secretary of State only to delegate the body named in the delegation order.
    It appears that these provisions are not sufficiently widely drawn for the new proposals which the Government envisage. The notes tell us that the Government want to designate POBA—the Professional Oversight Board of Accountancy—a new body set up under the FRC, as the body whose function will be the supervision of the auditing profession. It will therefore, presumably, take on the role of the Secretary of State in regard to certain functions relating to company auditors and the recognising of bodies which supervise auditors and/or pro vide professional qualifications. Since Section 46 allows only the body named in that delegation order to exercise these functions, Section 46 must be amended to allow POBA to do so instead.
    I realise that POBA will be a body under the FRC's new structure, but I have some questions for the Minister. First, which body has currently been designated under Section 46 of the 1989 Act? How will the transitional period work whereby the delegated functions are handed over from one to the other? Will the current body which carries out these delegated functions merely be subsumed into POBA?
    I am also unclear about Clause 4, which refers to the Secretary of State delegating functions to an existing body—so not just one established by an order under Section 46. My question is to do with timing. As I understand it, although the Minister said something else in the previous debate, POBA is not yet an existing body. It is a new body to be created under the FRC. It does not yet exist. Yet it is clear from the Explanatory Notes that the changes being made in Clauses 3 to 5 are designed to ensure that designation can be to another body which is expected to be POBA. Under Clause 3(2)(1A) are the two options of, in paragraph (a), the body which was designated in the order under Section 46 and currently carries out those functions or, in paragraph (b), subject to Section 46A, an existing body which the Explanatory Notes tell us is likely to be POBA. My confusion is that I am not yet aware whether POBA is an existing body.
    I imagine that the Minister will tell me that POBA will exist by the time these clauses of the Bill are brought into commencement. If that is the case, could the Minister tell us whether there are any other functions POBA will carry out apart from the delegated functions proposed here? Further, can the Minister shed some light on the basis of the change from old to new structure in terms of regulation of the audit and accountancy profession? Why is POBA more suitable than the current body which carries out these regulatory functions, other than the independence issue that we have already discussed? What has prompted the need for restructuring other than a bit of tinkering with appearances?
    GC 50
    We have had some briefing on the change to the new structure from our discussions with the ICAEW, which has emphasised to us some concerns with the three specific roles which it understands that POBA will undertake. I seek some clarification about the operation of POBA. The board will have three discrete functions: first, delegated responsibility for carrying out the Secretary of State's function of recognising supervisory bodies for audit; secondly, oversight of the accountancy profession; and, thirdly, responsibility for the operation of the new Audit Inspection Unit. To return to an issue that we have mentioned already, it is important that all three functions are exercised in concert with, rather than in opposition to, the existing regulators in the field.
    We have five chartered institutes: the Institute of Chartered Accountants in England and Wales; the Institute of Chartered Accountants of Scotland; the Institute of Chartered Accountants in Ireland, who cover Northern Ireland; the Chartered Institute of Public Finance and Accountancy; and the Chartered Institute of Management Accountants. There is also the Association of Chartered Certified Accountants. Those organisations have worked both singly and together over many years to create the high level of regulatory and disciplinary assurance which is now apparent in this country. We believe that if must be in the interests of the UK as a whole to ensure that the new regulatory arrangements under the FRC work closely with the existing chartered institutes to create a seamless structure of regulation in partnership. In view of the concerns that have been expressed to us by those outside bodies, it would be worth while if the Minister could give us assurances that he shares that view of the inter-relatedness of these regulatory arrangements, and the importance of ensuring that we do not inadvertently undermine our existing chartered institutes as we bring the new FRC arrangements into place.
    I turn now to the detail of the operations of the POBA. We believe it important to note the distinctions between the three operations for which it is responsible. In relation to its regulatory functions, it has the delegated responsibility from the Secretary of State for recognising supervisory bodies. Those bodies will then report to it, as they currently do to the DTI, annually to show how they have discharged their responsibilities for registration and supervision of auditors which are derived from statute, and it will be for POBA to decide whether they should continue to be suitable for recognition. The arrangements for registration, monitoring and inspection will derive from the Secretary of State's responsibilities and powers, and POBA will do no more in that area than exercise those powers on her behalf.
    The function of POBA in that regard is surely rather different from its second function, which is for oversight of the accountancy profession. Here we would expect POBA to take a wider look at how the profession as a whole is progressing. That function must be operated at a broad level, and can be exercised only with the agreement of the existing chartered institutes, which are responsible for the development

    GC 51
    and discipline of their members. While those institutes should welcome any input into the broad debate on how the profession can be developed—and indeed themselves voluntarily set up POBA's predecessor, the Review Board, precisely to get that broader view—to get the best out of the new system they surely should not be junior players in this partnership. They must remain free to accept, modify, and take forward in their own way for their members any recommendations made by POBA. I am sure that POBA will want to progress in a way which fully acknowledges the level of professional expertise and the depth of experience which the chartered institutes represent.
    On the third and final function—inspection and monitoring—my main point is that the new Audit and Inspection Unit, or AIU, which is the only executive function of POBA, needs to continue to work closely with the Quality Assurance Directorate, or QAD, of the Institute of Chartered Accountants in England and Wales, whose member firms deal with the vast majority of company audits. Here again, I emphasise the point made earlier by my noble friend Lord Freeman. While the AIU will in due course cover the top 50 or so audit firms, the QAD will have a very important continuing function in inspecting and monitoring the remaining 6,000 plus registered firms, many of them of significant size, and auditing companies which, although outside the AIU remit, are still substantial high- value companies. Again, our key point here is that the new arrangements must not undermine the strength of the arrangements which have developed over the last decade, and that we must present all our regulatory processes in an inter-linked way to those who are considering and assessing them from abroad. I should be grateful for the Minister's confirmation that he shares that view of the way in which the Professional Oversight Board for Accountancy will operate.
    Lord Sainsbury of Turville: I have two points of fact that are necessary for this discussion. First, POBA exists—at least, I am assured that it exists and have no reason to think otherwise. That is quite material to this discussion. Secondly, the powers that were in Section 46 of the Companies Act 1989 have never been delegated because of the complexities of that. That must be the starting point for this discussion.
    Clause 3 enables the Secretary of State to delegate to a new or existing body her functions under Part 2 of the Companies Act 1989—that is, powers relating to the regulation of the audit. At present, Section 46 of the Companies Act 1989 enables the Secretary of State to delegate her functions under Part 2 of the Act. However, the functions can be delegated only to a body created, through the delegation order, for the purpose of exercising those functions. Clause 3 changes this, so that the functions may be delegated to an existing body.
    The functions in question are primarily those of recognising supervisory bodies and qualifications for auditors. The Government's Review of the Regulatory
    GC 52
    Regime of the Accountancy Profession recommended that the Secretary of State should delegate those functions to the body responsible for independent oversight of the self-regulatory activities of the major professional bodies. The review concluded that that would result in more effective oversight of the bodies.
    We envisage that the functions will be delegated to the Professional Oversight Board for Accountancy, or POBA, of the Financial Reporting Council. POBA is the successor to the Review Board of the old Accountancy Foundation, although its remit has been significantly changed. Its other functions will be to oversee the self-regulatory activities of the major professional accountancy bodies and the new Audit Inspection Unit that is being established to monitor major audit work.
    The current delegation power in Section 46 has never been used. It was right for its time, but needs to be changed as there is a body already in existence which could carry out the Secretary of State's functions effectively. The change that we are proposing to the existing delegation power will enable decisions on the recognition of supervisory bodies and audit qualifications to be taken by a body that also has responsibility for oversight of the major accountancy bodies. I believe that the synergies that will be achieved will significantly improve the overall independence of the regime and the effectiveness of oversight of the supervisory bodies. That is part of a framework that we have put in place, which, without creating too heavy a superstructure, gives the independence that we are seeking.
    Lord Hodgson of Astley Abbotts: I am grateful to the Minister for that explanation, and for his reassurance that POBA exists. It was not clear to me from the conversations that we have had or from the Explanatory Notes that it had struggled into this world. That makes a difference to what we are discussing, and I am grateful for his explanation of the background to the clause and for the reassurance that he has given.
    Clause 3 agreed to.
    Clause 4 [Circumstances in which Secretary of State may delegate functions to existing body]:
    Lord Hodgson of Astley Abbotts moved Amendment No. 13:
    Page 5. line 41, leave out "to be likely"
    The noble Lord said: We now come to a group of amendments that relate to the delegation of functions to existing bodies. In moving Amendment No. 13, I shall speak also to Amendments Nos. 14, 15, 16 and 17. The amendments focus specifically on Clause 4; our concerns with this clause primarily focus on its drafting and whether it is drafted tightly enough.
    Amendment No. 13 is designed to probe the drafting of subsection (2) of the new Section 46A. According to the Explanatory Notes, subsection (2),
    "provides that the body to whom the functions are to be delegated must be willing and able to exercise the functions and must meet certain other conditions set out in subsection (3)".
    That is in paragraph 25 of the Explanatory Notes.
    We accept and agree with that in principle. No delegation should take place to an existing body unless it is willing and able to carry out the functions delegated to it. However, we are not sure about the drafting in subsection (2)(b). This states,
    "that the body has arrangements in place relating to the exercise of those functions which are such as to be likely to ensure that the conditions in subsection (3) are met".
    Our amendment would remove "to be likely". Arrangements should be in place which ensure that all conditions are met. To say that arrangements were "likely" to ensure that all conditions are met weakens the force of the argument. It raises the question of what criteria the Secretary of State is to use to make his or her judgment as to whether it appears that there are sufficient arrangements in the existing body which are likely to ensure that it can carry out additional requirements under subsection (3). That wording seems vague and ambiguous and does not add much to the drafting.
    That links in with our objection to subsections (3)(b) and (4), which describe the further conditions as specified in subsection (2)(b). The Secretary of State must consider whether the existing body meets these conditions before he makes an order. We have no problem with subsection (3)(a)—that the functions to be delegated will be exercised effectively by the existing body. That is fundamental. However, subsections (3)(b) and (4) are ambiguous and unclear. They say that,
    "where the delegation order is to contain any requirements or other provisions specified under subsection (4), that those functions will be exercised in accordance with any such requirements or provisions",
    and that the,
    "delegation order may contain such requirements or other provisions relating to the exercise of the functions by the designated body as appear to the Secretary of State to be appropriate".
    I am not sure at all what those additional requirements or other provisions are likely to be. What circumstances is the provision designed to cover?
    We would very much like to probe the Minister on those points because they are remarkably open-ended provisions. If the body is going to have to fulfil other requirements or provisions, we should know what these are or at least what they are likely to be. We need to be clear that under Clause 4 the right functions are being passed over to the appropriate body. We currently feel that subsection (4) goes some way beyond what is stated in the Explanatory Notes and provides a considerable degree of discretion to the Secretary of State as to how the provision is to be interpreted.
    In a bid to try to limit the scope of subsection (4), we have tabled Amendment No. 16, which adds the words,
    "for the effective exercise by that body of those functions".
    That was suggested to us by some expert legal advisers, who similarly highlighted the open-ended nature of subsection (4). It expressly links the "requirements or
    GC 54
    other provisions" which the Secretary of State may specify in that clause with the functions which have been delegated to that body.
    There is also some concern in the legal profession over a possible situation whereby the independence of the body might be compromised under subsection (5). As far as I am aware, the whole purpose of subsection (5) is to allow the body, POBA, to be involved in the independent monitoring subject to the arrangements made by the recognised supervisory bodies under Clauses 1 and 2, but also to take on the functions of the Secretary of State under Clause 4. The explanatory notes state:
    "The aim of this provision is to ensure that the POBA … is not precluded from exercising any delegated function on the basis of its involvement with the arrangements set out in clause 2".
    I am unclear how that dual role will work. What will happen if there is a conflict of interest? How will POBA be able to exercise its role independently under Clauses 1 and 2? We believe that there should be a proviso that the independence of the body is not thereby compromised, especially in view of the fact that while currently the Government have POBA in mind, there might be other bodies in future which could find themselves in a different and difficult position.
    This group of amendments is intended to probe the Minister so we can delve down into a few more details on the intricacies of the provisions and how they will work in practice. I hope, in that spirit, he will give us some clarification on the drafting of Clause 4 and what circumstances that it is designed to meet. I beg to move.
    6.15 p.m.
    Lord Sainsbury of Turville: This group of amendments deals with circumstances in which the Secretary of State may delegate her functions in relation to orders as to an existing body. The noble Lord, having attacked us for setting out these very detailed requirements for the board and having withdrawn that amendment, now has another amendment that says that the requirements are rather modest and that more requirements could be on the board. He can have it one way or the other; either the Secretary of State has responsibility to set some requirements down or she does not. We have a rather limited requirement here. Let me explain the thinking behind it.
    The whole group of amendments deals with the circumstances under which the Secretary of State may delegate a function in relation to auditors to an existing body. As noble Lords will be aware, we expect to delegate those functions to POBA, the Professional Oversight Board for Accountancy, of the Financial Reporting Council.
    Amendment No. 13 would adapt the existing proposed requirement so that it must appear to the Secretary of State that the arrangements which an existing body has in place as to how it will exercise the functions are such that the conditions in subsection (3) will be met—not just that they are likely to be met. As

    GC 55
    noble Lords will agree, it is extremely important that if statutory functions are to be delegated to an existing non-statutory body, there are provisions in place to ensure that the body is suitable. However, I believe that the current formulation that the arrangements must be such as to be "likely to ensure" that the conditions are met is sufficient. Amendment No. 13 would require a degree of certainty that it is not reasonable to expect in these circumstances.
    Amendments Nos. 14 and 15 would remove the power of the Secretary of State to insert additional requirements into the delegation order. Alternatively, Amendment No. 16 would limit the requirements that can be inserted by the Secretary of State into the delegation order to those that are concerned with the effective exercise by the body of the functions. Bearing in mind that this provision applies only when the functions are to be transferred to a pre-existing body, we consider it prudent to enable the Secretary of State to specify additional requirements or provisions if, and only if, the need should arise. I should emphasise that the House will of course have the opportunity to debate any such provision when the delegation order comes before it for affirmative resolution.
    I shall give an example of the kind of requirement that we have in mind. An example of a specific requirement or provision might be to ensure that, when reporting to the Secretary of State on the exercise of any delegated function, the body includes copies of the reports on audit regulation made to it by the recognised supervisory bodies.
    I now turn to Amendment No. 17. As part of its responsibilities, POBA will oversee the new Audit Inspection Unit which will monitor the audits of listed companies and other public interest entities. POBA's sister boards within the FRC—the Accountancy Investigation and Discipline Board and the Auditing Practices Board—will also be responsible for running arrangements in which we expect that the recognised supervisory bodies will participate in order to meet the new recognition requirements introduced by Clause 1 of the Bill.
    The purpose of subsection (5) is to ensure that the mere fact that POBA has a certain position in the FRC structure does not of itself prevent it from taking decisions on the matters which are delegated to it.
    I do not consider that Amendment No. 17 is necessary. In order to exercise any delegated functions effectively, POBA would have to perform them independently of any link that it has with the standard setting, monitoring and disciplinary arrangements by virtue of its position in the FRC or its functions in that structure. If POBA were to take irrelevant considerations into account in exercising its delegated functions, that would be likely to adversely affect the effectiveness with which POBA could perform its functions, thus calling into question whether it could continue to be the designated body. An example of an
    GC 56
    irrelevant consideration is whether the standard setting, monitoring or disciplinary arrangements are part of the same corporate structure as POBA.
    Lord Hodgson of Astley Abbotts: I am grateful to the Minister. I take his point on Amendments Nos. 13, 14 and 15. I was not entirely convinced by Amendments Nos. 16 and 17, but we may return to them at a later date when we have read what he has said. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    [Amendments Nos. 14 to 17 not moved.]
    Clause 4 agreed to.
    Clause 5 [Supplementary provisions about delegation orders]:
    [Amendment No. 18 not moved.]
    Clause 5 agreed to.
    Clause 6 [Approval of overseas qualifications for auditors]:
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 19:
    Page 8, line 17, at end insert—
    "( ) Any withdrawals. variations or revocations made under subsection (6) shall only apply to individuals not previously admitted under the provisions of this section.""
    The noble Lord said: Clause 6 amends Section 33 of the Companies Act 1989. That section deals with the approval of overseas qualifications of auditors. We of course accept that it is a very sensible provision, as we would always want there to be a facility to allow those who were recognised and qualified as accountants abroad to be able to practise in the UK. The Secretary of State has the power to give detailed specifications of those qualifications in other countries which he or she believes afford the same level of professional competence equivalent to that afforded by a recognised professional qualification in the United Kingdom.
    The change that is being made by the clause, as I understand it and as the Explanatory Notes make clear, is to allow flexibility so that the Secretary of State can recognise some people who hold a qualification but not others. That is essentially based on the premise that a certain foreign qualification might have been thought to be substandard and therefore unsuitable to be on a par with a UK qualification, but might subsequently be improved. In that situation, the Secretary of State would presumably want to approve any auditor who had gained the qualification after a specified date when the level was raised. The notes state other such examples where we agree with the Government that it would be sensible to allow the Secretary of State to recognise a qualification with provisos. That is in the interests of recruiting the best employees to work as auditors in the UK.
    Our amendment focuses, however, on what we believe is an unfair provision. Subsection (6) allows the Secretary of State to withdraw his approval of an overseas qualification after such a date as he may specify. We are concerned about the drafting of the

    GC 57
    clause. I know that the Minister will tell me that it almost mirrors the provisions already in Section 33(6) of the 1989 Act, merely amended to include the changes made in the new subsections (1), (1A) and (2). However, as I am always at pains to make clear, just because something has already been included in statute does not mean that it is not prudent to look again to see whether the provisions adhere to the principles of fairness, workability, balance and effectiveness that we strive to attain.
    My amendment is intended to probe what I see as a narrow but nevertheless possible abuse in the provision. If someone has been admitted as an auditor in the United Kingdom because he holds a qualification that the Secretary of State has recognised, it is unfair for that approval thereafter to be revoked, thereby prohibiting that person from continuing as a practising UK auditor. As currently drafted, subsection (6) says that the Secretary of State can withdraw his approval of an overseas qualification,
    "after such a date as he may specify".
    I understand that this ensures that if a qualification falls below a level which the Secretary of State believes is equivalent to the standard of a UK qualification, he can revoke his approval.
    We strongly believe that this should apply only to a date in the future; for example, if the Secretary of State realises that the standard of those attaining a particular accountancy qualification is not sufficient for them to practise in the UK as auditors, he should not be able retrospectively to withdraw approval from those who attained the qualification at a time when he approved of it. He could only specify a future date after which anyone with that qualification would not be eligible for practice in the UK. That seems only fair. Someone who has practised for perhaps five years in the UK should not be able to be told his qualification is now no longer recognised and therefore he is no longer approved for working as an auditor in the UK.
    I hope the Minister will tell me that this goes without saying. However, under the current drafting, the Secretary of State appears to be able to specify any date, past or future, for withdrawing his approval on a qualification.
    While we are discussing the clause, I raise some concerns of the professional bodies. They welcome the changes being made to Clause 6, but they believe the method by which overseas audit qualifications are approved and recognised in the UK should be looked at again. With the exception of individuals and qualifications covered by the European Union mutual recognition directive, only one overseas qualification outside Europe—that of the Institute of Chartered Accounts of Australia—has been recognised by the Secretary of State under Section 33 of the Companies Act. This long-standing failure to allow appropriately qualified members from overseas institutes to audit in the UK has led to a damaging impasse. The UK accountancy bodies have reciprocal membership arrangements with overseas institutes. It is clearly an unsustainable position that UK accountants are
    GC 58
    allowed to audit in overseas territories while accountants from those territories are barred from auditing in the UK.
    A recent consequence of this problem has been brought to our attention. In Canada the authorities have removed the recognition of UK chartered accountants. More jurisdictions may follow. The problem stems from the way recognition is decided upon and granted by the Secretary of State. To date, the UK has required a professional level of recognition rather than individual recognition agreements between recognised qualified bodies in different countries.
    Given that there are five recognised qualifying bodies of audit in the UK, each with a different member composition and viewed differently by overseas authorities, it has proved to date impossible in most cases to arrive at a situation where an overseas authority is willing to do what the Secretary of State here requires and agree to recognise members of all the bodies recognised for audit by the United Kingdom Government. It would be helpful if the Minister could make a few comments on this when addressing the amendment. I beg to move.
    Lord Sainsbury of Turville: I totally agree with the noble Lord that it is right that a person who obtains an overseas qualification that is recognised as being of a sufficiently high standard should be able to rely on it. Others should be allowed also to rely on that qualification. It would not be fair if someone had a perfectly good qualification one day, but not the next, through no fault of his own.
    Under new subsection (6), any withdrawal of approval of a qualification, or variation or revocation of a specified requirement, would apply from a date specified by the Secretary of State. In the event that this provision was used, the Government's policy is that a retrospective date should not be specified. Moreover, it is unlikely that this provision would be construed as providing a power to act with retrospective effect. Such a construction would not accord with the general principle against retrospectivity.
    I am told that if pressed I should draw noble Lords' attention to paragraph 1285 of Halsbury's Laws of England (Fourth Edition) volume 44(1). It states:
    "The presumptions that prevail on the question of whether by implication an enactment is or is not intended to be retrospective are based initially on the nature of legislation, which gives rise to the general presumption against retrospectivity. Thereafter those presumptions depend on the concept of fairness. It is because of the general presumption against retrospectivity that an enactment will not normally be treated as retrospective even where to do so would not be unfair to any person".
    The noble Lord's question about overseas qualifications is not directly relevant to this issue, but I will take it away and write to him specifically about it. It is a slightly different but important point.
    6.30 p.m.
    Lord Hodgson of Astley Abbotts: I am grateful to the Minister for that reassurance on retrospectivity and

    GC 59
    the learned quote from Halsbury's Laws of England. It was not exactly on the tip of tongue, and I am very grateful for the tutorial. I appreciate the point about the overseas institutes. Although it is not directly relevant here, I thought it was worth while ventilating while we are discussing overseas qualifications. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Clause 6 agreed to.
    Clause 7 [Disclosure of services provided by auditors and related remuneration]:
    Lord Hodgson of Astley Abbotts moved Amendment No. 20:
    Page 8, line 27, leave out "or by their associates"
    The noble Lord said: This group of amendments probes the issue of disclosure. This is our first sortie into Clause 7, and it might be worth outlining our general approach to disclosure. We favour disclosure; it is in the interests of both the company and the shareholders, but there are a number of issues in Clause 7 it is important to explore with the Minister.
    This group of amendments attempts to probe the Government on the definition of associates. Throughout this clause, we see that provision about disclosure is to be contained in regulations drawn up by the Secretary of State. Subsection (1) states:
    "The Secretary of State may make provision by regulations for securing the disclosure of—

    (a) the nature of any services provided for a company by the company's auditors (whether in their capacity as such or otherwise) or by their associates;

    (b) the amount of any remuneration received or receivable by a company's auditors, or their associates, in respect of any services within paragraph (a)".

    It is understandable that the details of how disclosure is carried out will be contained in secondary legislation. We are more concerned about paragraphs (c) and (d) of subsection (3), which state that the regulations will apply to services provided for associates of a company as well as the company itself, and that the definition of "associate" in relation to an auditor in a company will also be contained in regulations. We have, then, two definitions of associates.
    Lord Borrie: May I interrupt? It is the associates of the auditors, is it not?
    Noble Lords: No, it is both.
    Lord Borrie: I apologise. Thank you.
    Lord Hodgson of Astley Abbotts: We have two definitions of "associate": the associates of the company's auditor, as mentioned in subsection (1), and the associates of the company itself, as mentioned in subsections (2)(c) and (3)(c). Maybe I am wrong, but that is how I read it. It would be helpful if the Minister could shed some light on whether there are one or two associates—I think there are two—and how associates will be defined in relation to each of these two types.
    GC 60
    It would be unfair if a company organised itself, probably at considerable expense and administrative dislocation, in relation to disclosure issues on the basis of the definition of "associate" as set out in one set of regulations, only to be faced with a situation in which the definition changes and the company's structure and organisation is thereby thrown into turmoil. Can the Minister give any assurances that there will be a definition of "associate" to which auditors and companies can work, safe in the knowledge that it is unlikely to change?
    Disclosure is an area of great sensitivity. For our part, to avoid problems, we feel that on the whole it would probably be in the interests of greater transparency for the definition of "associate" to be on the face of the Bill.
    No doubt the Minister's official brief will say that a definition in regulations is necessary on the grounds of flexibility. If that is so, we need to know what the definition will be and how likely is it that it will be changed, because change would be disruptive and cause confusion. Some thinking from the Government on the circumstances in which the definition might be tinkered with would be helpful. We already know from paragraphs 35 and 36 of the Explanatory Notes that the definition of "associates" is being widened. Can the Minister comment on why that change was felt necessary?
    As I will be arguing in the next group of amendments, we are unhappy with the perhaps unnecessarily prescriptive rules being imposed on disclosing too specifically. If "associates" is taken at its broadest, then an awful lot of time and energy will have to be put into dissecting the services provided by auditors and remuneration provided to auditors in order to comply. After reading Clause 7, I find myself almost completely in the dark, since every one of the five principal subsections begins with that most elusive phrase "regulations may provide". Perhaps the Minister can enlighten us on the Government's thinking. I beg to move.
    Lord Sharman: This group of amendments addresses a matter of a delicate balance. As the noble Lord, Lord Hodgson, has rightly said, we are dealing with the remuneration paid to associates of the auditors in one case. In another case, we are dealing with remuneration expended by associates of the company. In so far as associates of the auditor are concerned, there is a difficulty because the auditor, if my memory serves me right, would have to be a registered auditor, and to be a registered auditor, it would have to have a certain percentage of its ownership in the hands of registered auditors. Services provided by other bodies within the same global arrangement, as it were, would therefore not be provided by the auditor. So I think it is very important that the regulations include an appropriate definition of "associate" in the broadest sense.
    I am cautious about incorporating that definition in statute, for one very simple reason. I spent a great deal of my working life in an organisation which might be affected by that and contains a large number of very

    GC 61
    inventive people. I believe that this will be a moving definition, and flexibility will be needed for that. So I caution the Minister about his approach, if I might be so bold.
    As regards the associates of the company, there is already a definition of an associated company—it sits there in accounting parlance. There we can afford to take a much tighter approach to the definition. I would encourage the Minister to be flexible on the one hand but more rigorous on the other.
    Lord Sainsbury of Turville: With Amendment No. 20, I propose also to speak to Amendments Nos. 21, 22, 25 and 26. I very much welcome the support for the general principle of the clause, but I think that to delete "associates" from the clause would be very unwise. It seems to me always wrong to have a piece of legislation where those legislating and those being legislated for can immediately see enormous scope for getting round the legislation. If you took out "associates", you would simply encourage people to do that. I think that "associates" will be defined in the regulation, which is probably the right place to do it.
    There is widespread agreement that greater disclosure is needed to increase transparency about the relationship between the company and its auditors, enabling judgments to be made about the relationship between the auditor and the client. Strengthening the disclosure requirements forms part of the Government's overall "post-Enron" package of reforms, as recommended by the Co-ordinating Group on Audit and Accounting Issues.
    Before I explain why, in the Government's view, these amendments should be resisted, I would like briefly to explain what the existing requirements are and how this clause extends them.
    Under existing Section 390A of the Companies Act 1985, companies are already required to set out in their accounts the amount they have paid their auditors for audit work and, through regulations made under Section 390B, the amount they have paid them for any non-audit work. But there is currently no requirement for the company to explain what different types of non-audit service have been purchased, nor to give anything other than a single, aggregate figure for the amount spent. This clause remedies that by giving the Secretary of State the power to make regulations requiring the company to set out more detail about the cost and nature of the non-audit services.
    The reason we consider that to be important is simple. We recognise that the provision of certain services by the auditors could potentially compromise their independence—for example, through the provision of tax services. However, that depends on the type and scale of the service provided, and therefore we wish such information to be made public by the company. The alternative would have been to ban such services altogether. But we prefer proper disclosure and transparency, and that approach probably has cross-party support.
    We are replacing Sections 390A(3) and 390B with a new Section 390B, which enables the Secretary of State to make regulations requiring disclosure by companies
    GC 62
    of the nature of the services provided to a company by its auditors and associates and the amount of remuneration to be paid for those services. The new provision will ensure that disclosures about audit and non-audit services are brought together in one place.
    I believe that it would be helpful to remind ourselves of those overall objectives before turning to the amendments themselves. I shall deal, first, with the associates of the auditor. The existing requirement is in respect of non-audit services provided by both the auditor and its associates, and the new requirement should be, too. The whole purpose of the disclosure is to make public the commercial relationship between auditor and company to ensure that there are no potential conflicts of interest or threats to independence. Permitting the company to say nothing about a service purchased from another part of the audit firm's network, as would be the result of the amendments, would defeat that object since clearly such a purchase could be highly relevant to the question of independence.
    The Institute of Chartered Accountants in England and Wales has produced best-practice guidance on disclosure by companies of the nature and cost of services provided by auditors. We have worked with the institute on this guidance. With regard to auditor associates, the guidance specifically states,
    "for the purposes of disclosure, the auditor includes the principal auditor and its network firms around the world".
    As recommended by the Co-ordinating Group on Audit and Accounting Issues, we will need to evaluate reaction to the guidance before coming to a final decision about how associates of the auditor are to be defined in the regulations. We shall, of course, consult publicly on draft regulations—a point which is relevant in regard to all the amendments on this clause. Of course, regulations are a legal instrument and therefore the definition will, of necessity, have to be framed in a more precise way than is the case in best-practice guidance.
    The argument about the associates of the company is slightly different. Under the existing regulations, an associated undertaking in relation to a company means its UK subsidiary undertakings. Again, I quote from the guidance on disclosure from the Institute of Chartered Accountants in England and Wales on the nature and cost of services provided by the auditor, as the regulations made under Clause 7 are likely to reflect the guidance:
    "Fees for work performed during the period for associates and joint ventures would not normally be disclosed. However, this should be considered on a case-by-case basis and additional disclosure would be appropriate if associates and joint ventures form a particularly large part of the group financial statements".
    We agree with that. The primary legislation is therefore drafted in such a way that we can, if we decide it is necessary to do so, require additional disclosure about associates and joint ventures in the regulations.
    We are also extending the definition of "associate of a company". Clause 7 ensures that services provided to associates of the company which are not "undertakings" may be included in the regulations as

    GC 63
    part of any disclosure. That would cover entities such as the company's pension fund. In our view, it could be of relevance to the question of the audit-client relationship that services have been provided to such an entity. The regulations should therefore be capable of being extended to cover them.
    We are sympathetic to the overall desire and need for the regulations to be carefully drafted in order to avoid unnecessary and complicated disclosure. We shall consult on draft regulations at the end of the year, together with a draft regulatory impact assessment. We shall not bring forward regulations which impose more requirements than are strictly needed to meet the policy objective. I hope that, on that basis, the noble Lord will feel able to withdraw the amendments.
    Lord Hodgson of Astley Abbotts: I am grateful to the Minister for the peroration at the end, bearing in mind that the regulatory impact of the provision is important. I accept the argument that "associates" is, or will have to be, a moving target if put into regulations. The amendments were designed to probe and to put the thinking on the record, and I am happy to beg leave to withdraw Amendment No. 20.
    Amendment, by leave, withdrawn.
    [Amendments Nos. 21 and 22 not moved.]
    6.45 p.m.
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 23:
    Page 8, line 43, at end insert—
    "(d) that where a company is part of a group such disclosures may be on a group basis"
    The noble Lord said: In moving Amendment No. 23, I shall speak also to Amendment No. 24. Here, we are concerned with how specific disclosure is intended to be under the regulations in subsection (2). At present, the drafting of the subsection is ambiguous. Paragraph (a) talks about the,
    "disclosure of the nature of any services provided to be made by reference to any class or description of services specified in the regulations (or any combination of services, however described)".
    That seems to be fairly vague. What degree of detail are we talking about here? Are the Government thinking along the lines of a limited number of categories—for example, audit, tax, IT implementation, advisory, covering business strategy and so on? If so, that is probably an acceptable approach.
    We wonder whether it is desirable to have a breakdown into amounts received for individual assignments or the kind of situation where a company would have to disclose fees incurred for a proposed take-over bid. Certainly, disclosure should not be so over-prescriptive that fee rates are exposed. There is an argument that that is a matter of commercial confidence and one where the marketplace should rule.
    The amendments are aimed to try to strike a balance. It is important, for two reasons, that regulations are not too detailed and over-prescriptive. First, there is an issue of group companies. When subsection (2)(c) talks about "separate amounts", does that mean for each individual company or for the group as a whole? Some companies, as part of a large group, would have a very large administrative burden on their hands in trying to disclose every specific figure for each company in the group.
    The Explanatory Notes are not particularly clear on this issue as they state, at paragraph 34 on page 9, that.
    "it will be possible to require separate disclosure of amounts paid in respect of tax advice by each company in a group or an aggregate figure for tax advice for the group as a whole".
    The two examples are very different. It would be helpful if the Minister could tell us which way the Government's thinking is tending—tax advice for each company in a group or a figure for the tax advice for the group as a whole? It is important to clarify that issue.
    Secondly, following on from that point, how broad or narrow will the categories be? We are all in favour of transparency, as we have made clear in earlier debates, but there would be issues of compliance with, for example, the FSA's market abuse provisions if one was required to provide intricate details of specific services. We are convinced that disclosure should be by broad category of service, and that is perfectly adequate to meet the Minister's requirement that shareholders or potential shareholders should be able to make a judgment. But this approach is by no means clear from the current drafting of the Bill. I hope that it will be made clearer in regulations.
    While full disclosure of non-audit activities is to be applauded, there may be circumstances where it is not in the company's, or indeed the shareholder's, interest to give full disclosure—for example, where confidential, price sensitive or commercially sensitive information is involved. In many situations, such as take-over bids for other companies, disclosure would not be advisable. I look forward to hearing the Government's thinking on this point. I beg to move.
    Lord Freeman: I support Amendment No. 24 in the name of my noble friend Lord Hodgson and shall add a little detail based on my own personal experience. Before I do so, perhaps I may say that I very much agree with the Minister about the principle of disclosure and I hope to support what my noble friend said. It is right that non-audit fees are disclosed where an audit firm has a relationship that extends beyond merely auditing. That must be right in the sense that it will be for the different regulatory bodies and the general public to judge whether a prima facie case of influence is being brought to bear on the auditors by the non-audit partners in that firm. Therefore, I have no problems about disclosure.
    However, a small matter of equity is involved here. Perhaps I may explain that and ask the Minister to consider the record when regulations come to be drafted. I am adding a little detail to what my noble friend Lord Hodgson said. There are two types of fee

    GC 65
    basis that firms of accountants charge: one is time and the other is percentage or contingent fees. Contingent fees are charged on a very narrow range of services, normally acquisitions and sales of businesses. Over the past 10 years, major accountancy firms—I cannot speak for the medium-sized firms, but certainly the big four—compete head on with investment banks in a certain segment of the market which is called the mid-cap.
    In my judgment, it would be very inequitable if investment banks were not forced to disclose their fee rates, the percentage rates which are highly competitive, highly market-sensitive and I believe commercially confidential. Accountancy firms have to disclose them. That would be unfair to the profession. It seems to me that some form of aggregation should be permitted and my noble friend Lord Hodgson has already indicated aggregation perhaps of tax or IT implementation—to the extent that that service is still provided—and general advisory services. The general public and the regulatory bodies should be interested in the total amount of the fee paid. A small part of the fees paid to accountancy firms is commercially sensitive, as my noble friend said, and it would be inequitable to single out accountancy firms to disclose through the annual accounts of their clients the precise nature of the fee because it could be worked out very quickly and it would be to their disadvantage. I support the general thrust of Amendment No. 24 and I hope that the Minister will reflect on the matter before producing draft regulations.
    Lord Sharman: Perhaps I may make a couple of observations on what should be disclosed. First and foremost, I shall touch on the issue of contingency and percentage fees. It is my understanding that the Institute of Chartered Accountants does not allow percentage fees for audit clients. That is one of its ethical standards which has been recently adopted so that one would not have a situation with an investment hanker. The disclosures that have taken place today are working up into what I would call a statement of best practice. At the moment a listing agreement requires disclosure of non-audit fees. Increasingly audit committees take a great deal of interest in determining the relationship with the auditors, as they are required to under the revised arrangements, which were incorporated after the Higgs and the Smith reports. There is a good body of practice which already exists about what should be disclosed and what is sensible. I encourage the Minister, when debating the regulation to look at what is happening at the forefront so that we have a regulation that is readily accepted.
    Lord Freeman: Clearly the noble Lord, Lord Sharman, is right. We "SEC attested" audit clients, but how the fee is calculated for non-SEC attested audit clients in the Untied Kingdom ultimately would be expressed in terms of the percentage. It is the percentage rate of the fee, however negotiated, that is important and commercially sensitive.
    Lord Evans of Temple Guiting: I shall speak to Amendments Nos. 23 and 24. The amendments reflect concerns as to whether groups preparing consolidated accounts will need to provide for disclosure below the consolidated level. That is certainly a point that we will need to consider carefully when drafting the regulations. We recognise the concerns raised by noble Lords and in particular the desire to avoid burdensome regulations. We shall be looking to business itself to help us in evaluating the economic impact of these new requirements as part of a cost-benefit analysis to be published in a draft regulatory impact assessment which we expect to have drafted by the end of the year along with draft regulations. We shall not proceed with any requirement whose cost is estimated to outweigh its benefit. But that does not, we believe, argue for removing the power to provide for disclosure below the group level. While for some, maybe most, non-audit services group level disclosure will be appropriate, there may be instances when disclosure below this level is appropriate in the interests of transparency. It would be wrong to remove this flexibility only to discover at a future stage that there are circumstances when we want to be able to require disclosure below the group level, even if those circumstances are very limited.
    The noble Lord is also seeking a broad categorisation of the classes and description of the services provided by the auditor. I can assure him that we envisage a broad classification of types of non-audit services. We will draw on the categories in the ICAEW guidance which are themselves in line with those in the European Commission's recommendations on auditor independence.
    We will want to be sure that the categories are effective and clear. We expect the categories to be: audit services, broken down into statutory audit and audit-related regulatory reporting; further assurance services; tax services, broken down into compliance services and advisory services; and other non-audit services, which will be broken down under a series of headings, such as financial information technology, internal audit, valuation, litigation and recruitment.
    We will be consulting with the Auditing Practices Board, among many others, to ensure that these map across to their independence standards for the audit profession. However, there may be occasions when a more detailed definition of the nature of the services may become necessary, so again, we wish to retain the flexibility to make regulations to cover this.
    Let me assure noble Lords that it is not our intention to produce vast amounts of additional specifications. I repeat that we are sympathetic to the concerns and the overall desire and need for the regulations to be carefully drafted to avoid unnecessary and complicated disclosure.
    We will take into account the very interesting points made by the noble Lord, Lord Freeman, and the noble Lord, Lord Sharman, when drafting the regulations. It is important to put on record that we will be working closely with the accountancy profession as these rules and regulations are drafted.

    GC 67
    Finally, the amendment reflects concerns about whether a disclosure under this power might run counter to the Financial Services and Markets Act 2000 rules about the release of market-sensitive information. We think this is a hypothetical scenario, given the broad classification of services proposed. What is more, the disclosure is made once a year, after the event. Even if it shows that the company spent a certain amount on, for example, getting its auditor to do due diligence work, that does not tell the markets anything worth knowing about its takeover and merger plans. If the company really does not want to have to disclose any information at all in this regard, the answer is simple—go to anyone else other than the auditor for this service. I must remind Members of the Committee that the objective is only to require disclosure when the firm carrying out the audit is also carrying out other work—nothing else.
    The noble Lord, Lord Hodgson, raised the question of tax advice. We want to ensure that the disclosure of separate amounts of remuneration paid by the company and its associates can be required in respect of the aggregate amounts of remuneration received in respect of a particular class or description of services from the company and its associates. If, for example, we wish to require disclosure of remuneration received in respect of tax advice, we shall be in a position to require disclosure of each separate amount of remuneration received from each company in the group rather than being able to require an aggregate figure for tax advice remuneration to the group as a whole. We have not yet reached a decision on this one but we shall consult with the profession.
    7 p.m.
    Lord Sharman: Before the noble Lord sits down, is he able to confirm my understanding of his remarks, which is that the nature of disclosure which will be regulated will require disclosure of the nature of services and the quantum of money paid for those services, but will not require disclosure of the basis on which the fees are arrived at?
    Lord Evans of Temple Guiting: That is correct.
    Lord Hodgson of Astley Abbotts: This has been a most helpful debate and I am grateful to the noble Lord, Lord Sharman, and my noble friend Lord Freeman for their expert detailed back-up. Accepting the need for disclosure and transparency, the comfort I took from the Minister's response was that the Government would look to the profession and to business to help in drafting cost-effective and workable regulations and that we are going down the route of broad classifications, not highly detailed ones. In those circumstances I am happy to beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    [Amendments Nos. 24 to 26 not moved.]
    Lord Hodgson of Astley Abbotts moved Amendment No. 27:
    Page 9, leave out line 28.
    The noble Lord said: This amendment is intended to probe the thinking behind subsection (7). This subsection states:
    "The regulations may make different provision for different cases".
    At first glance I was not entirely sure that I understood what this meant. It implies that some companies should be subject to more stringent regulation on disclosure than others. This would seem to be an unlevel playing field. Once one accepts the principle of disclosure it seems fair enough to assume that all companies should act according to the same rules.
    I was more encouraged when I turned to the Explanatory Notes. At paragraph 39 they explain:
    "It enables the regulations to differentiate, for example, between larger and smaller companies. It is intended that, as at present, the detailed disclosure requirements relating to non-audit services will not apply to companies qualifying as small or medium-sized (SMEs) under the Act. SMEs will, however, have to continue to disclose the audit fee itself where relevant".
    We certainly welcome any measure which recognises that regulatory burdens on small and medium sized companies should be alleviated as far as possible. When reading this Bill it is very easy to think in terms of FTSE 100 or 350 companies and big business and to forget the smaller companies which will have less time, staff or expertise but will be forced to handle the same amount of regulation. Can the Minister, therefore, shed any light on this intention to disapply detailed disclosure requirements for SM Es? While we are on the subject of disapplication, could he give us any idea, in general, of any other exemptions for SMEs in this Bill? Many SMEs will not have internal audit facilities. Are they still forced to fulfil every regulation which their larger colleagues are under this Bill? It brings us back to the issues raised in the debate we had on Clause 2 on listed companies and the imbalance between the FTSE 350 index and the rest of the market. I welcome the thought that the Government need and accept a lighter regulatory touch for SMEs and I look forward to hearing the Minister's thoughts on this issue. I beg to move.
    Lord Evans of Temple Guiting: I recognise that with this amendment the noble Lord, Lord Hodgson, may seek an indication of how this power to make different provisions for different cases might be exercised.
    Let me explain the reason for this provision. There may be instances where we would wish the regulations to differentiate, for example, between larger and smaller companies. This is provided for in this section; that is, subsection (7) of the new Section 390B which is the subject of the noble Lord's Amendment No. 27. As under the present regulations, we intend to continue to exempt small and medium-sized companies from the disclosure requirements relating to non-audit services. This is not, therefore, an amendment we can accept. Having heard my explanation, I hope that the noble

    GC 69
    Lord will feel able to withdraw the amendment. I shall write to him about the point he raised about SMEs. I shall do so within the next few days.
    Lord Hodgson of Astley Abbotts: The Minister was kind enough to give the reassurance and the clarification that I sought. I look forward to receiving his letter. In the mean time, I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Lord Hodgson of Astley Abbotts moved Amendment No.. 28:
    Page 9, leave out line 29.
    The noble Lord said: The Committee will be relieved to hear that I can be extremely brief on this amendment. It seeks to leave out subsection (8) of new Section 390B which reads:
    "Nothing in subsections (2) to (7) affects the generality of subsection (1)".
    I have no idea what this means in terms of the practical enforcement of compliance with regulations about disclosure as set out in this new section. Will the Minister please enlighten me and the Committee? I beg to move.
    Lord Evans of Temple Guiting: The noble Lord is probing why we need new subsection (8), which states:
    "Nothing in subsections (2) to (7) affects the generality of subsection (1)".
    The explanation concerns the logical construction of the section rather than policy as such. The first subsection of the clause deals with its main objective; namely, to permit the Secretary of State to make regulations which require the disclosure of the nature of any services provided by the auditor, and the cost of those services, broken down into certain categories.
    The following subsections then set out various matters which the regulations made under this power may provide for. But they are not intended to be exhaustive. The role of subsection (8) is to ensure that this is the case. If it were deleted, as the amendment seeks to do—I fully accept that this was tabled as a probing amendment—then the power might be read as being limited by the specific provisions in subsections (2) to (7). That is not the intention of the clause and we want to make that absolutely clear. To put it another way, subsections (2) to (7) specify provisions that may be included in the regulations, but they should not preclude the possibility of other provisions being made in order to achieve the clause's objective. The effect of deleting subsection (8) would be to prevent the regulations saying anything other than what was provided for in the subsections.
    Lord Hodgson of Astley Abbotts: I am grateful to the Minister for that. Parliamentary draftsmen, like God, move in mysterious ways. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 29:
    Page 9, line 35, leave out "accordingly ceases to have effect" and insert "ceases to have effect when regulations under section 390B(l) come into force"
    The noble Lord said: I rise to speak to Amendment No. 29. In Clause 7—
    The Deputy Chairman of Committees (Viscount Simon): A Division has been called. The Committee stands adjourned until 7.18 p.m.
    [The Sitting was suspended for a Division in the House from 7.8 to 7.18 p.m.]
    Lord Hodgson of Astley Abbotts: I rise to speak to Amendment No. 29. In Clause 7 on page 9, subsection (2) at the bottom of the page appears to delete two provisions with immediate effect. I do not think this can be right. They should be deleted only when the regulations referred to in the preceding section have actually been made; otherwise, there will be a period of non-disclosure which would obviously be unadvisable.
    I had the opportunity to quiz some members of the Bill team about this matter. They assured me that the regulations were intended to come in with immediate effect; that is, simultaneously with the commencement of the Bill. However much I may be reassured on this point as a non-lawyer, there appears to my untutored eye to be no provision in the Bill which guarantees that that is the case. Ashurst, the City law firm, which has given us helpful advice on the Bill, believes that there is a gap. Can the Minister clarify the situation? Our amendment is merely designed to plug that gap by making it clear that the relevant provisions cease to have effect when the regulations come into force. I beg to move.
    Lord Evans of Temple Guiting: I am grateful to the noble Lord for raising this point because it gives me an opportunity to state on the record exactly how a clause such as this, which repeals an existing requirement and replaces it with a new one, will operate.
    I appreciate that this amendment has been tabled to ensure that there is no gap between the repeal of existing legislation and the commencement of our new legislation. We recognise the concerns of the noble Lord but let me assure those present today that the repeal of Section 390A(3) will not be commenced until the regulations are in place. In short, there will be no such gap. "Ceases to have effect" does not mean ceases to have effect immediately. As a result of Clause 62(1), in fact it means ceases to have effect on a day appointed by the Secretary of State by order. The appointed day will be the same as the day on which the regulations made under this clause come into effect. I hope that that reassures the noble Lord.
    Lord Hodgson of Astley Abbotts: Indeed, it does. It is wonderful that the phrase "ceases to have effect" carries with it implicitly the words "on a day appointed by the Secretary of State", and I should have known that. How silly of me not to have grasped that. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Clause 7 agreed to.
    Clause 8 [Auditors' rights to information]:
    Lord Hodgson of Astley Abbotts moved Amendment No. 30:
    Page 10, line 9, leave out "accounts and vouchers" and insert "and accounts"
    The noble Lord said: We are now moving into Chapter 2 of the Bill and dealing with accounts and reports. In moving Amendment No. 30, I shall speak also to Amendments Nos. 34, 37 and 40. The amendments relate to Clause 8 and the type of information to which the auditors are allowed access. I have had the delightful privilege of being told by the accountants that these amendments are ridiculous and by the Law Society that they are wonderful. Therefore, the professions are at odds on this one.
    The information is specified in the Bill as being of,
    "the company's books, accounts and vouchers (in whatever form they are held".
    Our amendments seek to remove the word "vouchers" from this drafting of the Bill. I do not suggest that that will bring about any fundamental change to the Bill, nor, indeed, is that the intention. Instead, the amendments aim to help to modernise company law by dispensing with redundant references which no longer need to clog up our legal system.
    No doubt the Minister will argue that "vouchers" is included in the wording of existing legislation and that any change to the established wording runs the risk of the courts drawing the conclusion, at a later date, that Parliament's will was in favour of some underlying policy change on this issue. I reject that interpretation as a counsel of despair.
    The Minister will be familiar with my wish, in the interest of deregulation, constantly to review critically the wording of statutory instruments to ensure that they reflect modern conditions. It is a process to which I have referred in my debates with him as "removing the barnacles". If we do not remove the barnacles, the ship of state moves at an ever slower pace through the water.
    Ample confusion already exists in company law with the impenetrable cross-referencing of sections between the various Companies Acts, frustrating not only me but the majority of professional legal practitioners. This long overdue renewal of company law may be a distance away but this is just a small example of an improvement that will bring company law into line with modern parlance and usage.
    We are encouraged in our view by the Law Society, which, commenting on this amendment, said:
    "We have reviewed the amendments that you have tabled and in general we are supportive of your proposed changes to the Bill. The Committee is particularly pleased that you are intending to seek the deletion of the word 'vouchers' from the phrase `company's books, accounts or vouchers' to which an auditor would have a right to access under clause 8.
    Comments from the Law Society's Company Law Committee expand upon that further. It says:
    "Perhaps the opportunity could be taken to modernise and clarify the expression 'books, accounts and vouchers.".
    GC 72
    I stress that the amendments are not in any way intended to change the meaning, direction or implication of the clause. I invite the Minister, when he comes to reply—in accepting the amendment, of course—to make it clear that no underlying policy change is meant or intended. The intention here is simply to abandon an anachronism and, in so doing, to help to bring company law up to date with a more genuine reflection of contemporary company practice. As I know the Minister will recognise, Bob Cratchit has had his day. We live, for better or worse, in an electronic age. So away with vouchers; away with a barnacle. I beg to move.
    Lord Sharman: I speak for my side. I want to speak to this amendment because I believe that there is a fundamental difference between lawyers and accountants on this issue. It is all very well to talk about modernisation of company law. There are three aspects here. The books of a company are the fundamental records in which transactions are recorded. They have moved and modernised. When I was a boy they were kept on pieces of paper and today there is electronic inscription.
    The accounts of a company are the summaries of the transactions recorded in the books which are presented to those who have an interest in the results of the operation. They can be filed electronically, but I would submit that the vouchers have not changed. The vouchers are the pieces of paper that support the transactions that are in the books. They are the invoices for goods, the sales invoices, and so on. Take them away from the auditor and there is no audit.
    Lord Borrie: What an excellent speech that was.
    Lord Sainsbury of Turville: I agree with the noble Lord, Lord Sharman, that the word "vouchers" has a very old-fashioned feel to it. In this context, I believe it is the right word. There are dangers in changing well understood terms and introducing a change of substance where none is intended.
    Under existing legislation, as set out in Section 389A of the Companies Act 1985, a company's auditors are given access to a company's books, accounts and vouchers. The word "vouchers" in this context means documents which vouch for or provide evidence of a transaction such as invoices and receipts, to which of course the auditor must have access as of right. We decided to retain that terminology to avoid introducing any doubts as to whether the scope of the material to which an auditor has right of access was being altered in any way.
    As you see, we have made it clear that the auditors have the right to access those items in whatever form they are held, which would include electronic forms. On that issue, if on no other, it is accountants versus lawyers, and that is based on a great deal of experience over the years of where fraud often starts, which is on the vouchers. Fraud rarely starts in the accounting process. People claim to have assets that are not there and claim to have modern stock that they can sell when it is out of date or does not exist. Vouchers are the essence of what one needs for fraud.

    GC 73
    While I have some sympathy with the sentiment underlying the amendment, this is where the accountants have a stronger case and we do not believe that it is necessary or desirable to change the wording in the Bill.
    Lord Hodgson of Astley Abbotts: I said that accountants and lawyers are diametrically opposed. One rarely receives completely opposing briefing, but it was interesting. I understand the points that have been made. I am not surprised. We discussed the matter with the Bill team. I had hoped that the Minister would be able to get round the point about the will of Parliament changing by saying that the will
    GC 74
    of Parliament was not changing, but I see the point that is being made. I beg leave to withdraw the amendment.
    Amendment, by leave, withdrawn.
    Lord Evans of Temple Guiting: This may be a convenient moment for the Committee to adjourn until tomorrow at 3.30 p.m.
    The Deputy Chairman of Committees (Viscount Simon): The Committee stands adjourned until Wednesday, 17 March at 3.30 p.m.
    The Committee adjourned at twenty-nine minutes past seven o'clock.