(11 years, 10 months ago)
Grand CommitteeRead Hansard Text Read Debate Ministerial Extracts
The Deputy Chairman of Committees (Baroness Fookes)
My Lords, I am required to remind the Committee that if there is a Division in the Chamber we will adjourn for 10 minutes. I must say, it seems highly unlikely.
Clause 68 : Licensing of copyright and performers' rights
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
My Lords, in its 10th report of this parliamentary Session, the Delegated Powers and Regulatory Reform Committee considered that the exercise of a number of the powers in these provisions should be subject to the affirmative procedure, at least the first time that they are exercised. The amendments in this group take heed of this recommendation. I am pleased to say that, in fact, they go further by requiring that not just the first use of the powers but all uses be subject to the affirmative procedure. I trust that this additional, significant safeguard in the Bill gives due comfort and assurance to those who have expressed concerns about the exercise of these powers. I beg to move.
Lord Clement-Jones
My Lords, I shall say just a few words on the Minister’s very welcome amendments in response to the 10th report of the Delegated Powers and Regulatory Reform Committee. It is very interesting. The committee demonstrated the value of a collective memory, as it took us all back to the Digital Economy Act and the comments that it made at the time; it has been entirely consistent. It is good to see that the Government have responded. However, I wonder, especially in light of the fact that the Minister has confirmed that the affirmative process will be used for Clause 68, whether he will also confirm that the affirmative process will be used when the Hargreaves exceptions are introduced under the European Communities Act. The Minister has clearly stated that the Government will not be using Clause 66 when those exceptions are introduced; it will be purely for penalties. We very much welcome the assurance that the Minister gave on Monday. However, will he take the opportunity to confirm that the scrutiny process will be by the affirmative procedure of both Houses when those draft statutory instruments come under the ECA procedure?
Lord Stevenson of Balmacara
My Lords, we on this side will also be interested to hear the answer to that question, although I think I gathered from remarks made previously in Committee that that is the case. We will look forward to hearing about that. Other than that, we are very grateful to the Minister for bringing forward these amendments, which, as he says, go a step further than the DPRR Committee recommended, but are none the less welcome for that.
Baroness Buscombe
My Lords, I add my welcome for these amendments and thank the Minister.
Viscount Younger of Leckie
My Lords, I begin by expressing my thanks to my noble friend Lord Clement-Jones for the important part that he has played in the passage of the Bill so far. This is indeed a complex area and his contributions have demonstrated an unrivalled depth of knowledge and a robust grasp of the intricacies of this debate. I appreciate and respect the vigour with which he has presented his position to the Committee. The Government know that at the core of his work on the Bill is his determination to see a stronger and fairer copyright framework in the UK. In answer to his question concerning the affirmative procedure when the Hargreaves exceptions are implemented, I can confirm that we will use the affirmative procedure. This will, I hope, go some way towards answering the question raised by the noble Lord, Lord Stevenson.
I am pleased that these amendments have been accepted in the spirit in which they were intended. The Government recognise that the powers in these provisions could have a significant impact on creators and users of copyright works. I am confident that these amendments ensure that any use of those powers will be subject to significant parliamentary scrutiny.
Lord Clement-Jones
My Lords, I think we gave the issues a pretty good airing on Monday, so I will not tax the patience of the Committee for too long today. The Minister is well aware that there are many who think that we should align ourselves to the EU directive and that the extended collective licensing arrangements go well beyond where we should be at present, given that the digital hub could solve some of our problems.
The first thing I want to do is return the compliment to the Minister for the care and attention that he has given in his capacity as the Minister for Intellectual Property, and for listening to the arguments that have been made. I thank him particularly for his clarification and assurances and, latterly, for his letter which, although directed at the noble Lord, Lord Stevenson, seemed to encompass most of the questions that I had asked, so I was pretty satisfied with that way of dealing with things. In particular, I welcomed the assurances he gave about the ECL on Monday: the Government are clear that an opt-out must be as simple and as low-cost as possible for rights holders; and further safeguards to be drafted in the regulations will require the licensing body to set out the details of opt-out systems, why they are appropriate to meet the needs of rights holders and how it plans to publicise the scheme so that rights holders can opt out in advance. Moreover, the Secretary of State will be able to impose conditions on an authorisation relating to the opt-out if necessary. I found all that very reassuring.
Above all, I hope that the Minister recognises that many bodies and institutions—many of them represented by FOCAL and BAPLA—are still very unhappy about both ECL and orphan works. I hope he will continue to listen and engage with all those organisations. I also mention Stop43 in that context. There is certainly a very strong feeling that the impact assessment—particularly for orphan works, which have a range of 9 million to 91 million—is hardly credible as a business plan. I have made the point directly to officials that genealogy or genealogical services are not a great basis on which to work out a business plan. The Minister has answered many questions but there will be others coming down the track, such as whether the Copyright Tribunal is really suitable and exactly what a “diligent search” consists of, especially when there are several works by the same author. My wording might not have been as good as it should have been, but we were trying to get at the fact that care needs to be taken in respect of individual works and where there are multiple rights holders. What copyright items will be included in the definition of orphan works?
The EU directive does not include photographs, and for that very reason, photographers and the whole of that sector have become very exercised about the new provisions. Therefore, particular care needs to be taken in respect of that sector, as we heard from the noble Lord, Lord Greenway. I recognise that if the museums and universities and so on want to see ECL, then they have to justify how it is used and its impact on rights holders.
As regards ECL, the impact assessment states that the UK’s existing rights clearance system is complex, involving multiple users and rights holders seeking and granting permissions. Hargreaves recommended that it be simplified. Government intervention is required to introduce ECL as a tool for simplification. Is that not precisely what the copyright hub is designed to do? There is the concern very strongly held by foreign rights holders—I mentioned the letter from the US photographers to the Secretary of State—that they will have very inadequate means of monitoring what is happening in the UK.
There are many other questions and I do not want to prolong the session today. There is the whole question of what “substantial support” means for a collecting society in what the Minister said on Monday. What sums of money will be paid to copyright owners under ECL? What will be the duration of licences? Will ECL societies have the right to license just UK content or content from overseas? How will copyright owners know which of their works have been licensed, and so on? Considerable clarification is needed, not least that for the Association of Authors’ Agents. When we were talking about that, the Minister distinguished between certain warranties and other warranties. That was perfectly fair, but nevertheless clarity will be all when dealing with these matters.
The task of the Intellectual Property Minister, especially in these circumstances—holding the ring between different interests—is not easy, but I commend the newsletter from Victoria Espinel, who is the Intellectual Property Enforcement Coordinator in the States. As a statement of the balancing of intellectual property rights with innovation and growth, I cannot fault what she has said about the new United States-Russian Federation intellectual property rights action programme. How about that for a salient? She states:
“Strong IPR protection and enforcement are vital to promoting innovation and creativity by securing the rights of innovators and the creative community, attracting high-technology investment, and fostering the jobs necessary for long-term sustainable growth”.
That seems to me to balance very well the interests of all parties and I commend that to the Minister.
Baroness Buscombe
My Lords, I rise briefly to add a few words in support of everything that my noble friend has said thus far. I also want to refer to a letter addressed by the Minister to the noble Lord, Lord Stevenson, and thank the Minister because it addresses some of the questions which I raised in the Committee’s previous session.
The Minister and the Government agree that when licensing bodies operate ECL, they should do so transparently and should provide for fair treatment for non-member rights holders whose works are licensed through ECL. Any licensing body that wishes to operate a scheme will be required to have a code of practice that complies with the Government’s minimum standards for collecting societies. This will include specific protections for non-member rights holders. We welcome that statement and the statement about the applicability of UK ECL schemes for the use of works outside the UK. The Minister has said that the Government’s proposals would apply only to use within the UK. It is not possible to extend these provisions to other jurisdictions.
I thank the Minister for that but would just say that, where the Minister refers in response to a point raised by my noble friend Lord Clement-Jones about the operation of ECL in Nordic countries, while the Minister said that, since the 1960s, ECL has operated in the Nordic countries without challenge and is explicitly recognised in EU law, there is a difference. This is something to which we will have to give more thought between now and Report. In Nordic countries, the system operates against a background of legislation that guarantees remuneration for creators and the identification and integrity of works. I feel that we are making real progress on this Bill, and I support the Minister’s helpful responses to our concerns thus far.
Finally, I add my continuing concern in relation to photographers. A number of noble Lords spoke on this issue on Monday. It remains a serious concern, and it might be helpful if we could have more thought prior to Report about how the future viability of being a photographer in this digital age could be addressed in the Bill.
Lord Stevenson of Balmacara
My Lords, we on this side of the Room support the introduction of the measures to do with orphan works and believe that the extended collective licensing system represents a good way forward, albeit, as has been pointed out by the noble Lord, Lord Clement-Jones, that it has to be done in conjunction with the copyright hub, which provides the missing ingredient in a lot of what we have been discussing recently.
As was made clear, we have some reservations about how the Government intend to ensure high standards of operation for collecting societies which are, after all, effectively monopolies in many sectors, so we are keen to see, at a very minimum, clarity on the standards to be set for collecting societies and transparency over the way the powers that the Government are taking will operate in practice. We also want to make sure that everything that needs to be done is done to make the copyright hub work well. The new regime and the copyright hub should ideally be brought into existence contemporaneously.
However, we are confident that things are moving in the right direction, and we hope that there will be opportunities for your Lordships’ House to be regularly updated on matters such as this so that we can feed in our continuing thoughts and support. I particularly refer to the point about photography, which I absolutely endorse. There is an issue there that we will need to keep an eye on. Assuming that everything is going well, we cannot support the noble Lord, Lord Clement-Jones, in opposing Clause 68 standing part of the Bill.
Viscount Younger of Leckie
My Lords, the very limited extent to which orphan works can be used is not just a cultural issue, but a real economic issue. The clause will allow for commercial and non-commercial use of orphan works in the UK. The Government estimate this could lead to benefits of up to £220 million a year. Nine out of 10 respondents to the Government’s consultation were in favour of commercial use of orphan works. The UK scheme has more safeguards than the EU orphan works directive. It includes a requirement that any diligent search is verified by an independent authorising body. The authorising body will not be able to license itself.
We are also making provision for remuneration of rights holders at an appropriate rate for the type of work and type of use. The directive is less restrictive about this. Remuneration will be paid whenever a work is used. It is yet to be determined how long such money should be kept on escrow for the returning rights holder. However, after a certain period it is envisaged that unclaimed money will be redistributed. Where the money has come from publicly funded institutions, such as archives, it may be possible for that money to be returned to fund archiving, preservation and digitisation costs.
The Government are pleased that the digital copyright hub is developing but have not yet made any decisions about who will run the orphan works scheme. However, regardless of its final decision, these powers are needed to enable the chosen organisation legally to operate the scheme.
The noble Lord, Lord Stevenson, my noble friend Lord Clement-Jones and other noble Lords raised concerns about the potential impact of these proposals on photographers. The Government continue to work with the photography sectors. The working group on orphan works and extended collective licensing contains significant representation from the world of photography, including the Association of Photographers, the British Association of Picture Libraries and Agencies and Stop43.
The Government appreciate that the stripping of metadata is a real problem for photographers. As noble Lords have noted, this is a current problem, and the practice continues despite the existence of legal instruments making it an offence. I am willing to meet noble Lords, who, in the course of this Committee session, have raised concerns, to discuss possible solutions to the problem of metadata stripping. This is an issue that is also being examined by the industry-led digital copyright hub, following Richard Hooper’s July report. However, the Government do not believe that the introduction of the orphan works scheme will negatively affect photographers, because historical photographs held in museums, archives and libraries, will form the bulk of photographs licensed under the scheme. If anything, the orphan works scheme will very likely improve matters, as it will become more obvious if works are being used unlawfully. Officially licensed orphan works, whether sourced from digital or analogue sources, will carry a reference to the authorising body. Courts may also take a dimmer view of infringement, if there is a legitimate and legal means of using orphan works.
The provisions on extended collective licensing are designed as a tool to help streamline rights clearance, but only where the sector wants it. We know that some collecting societies already operate extended collective licensing-type schemes, which are unregulated and unlawful. This means that rights holders are unprotected and could be missing out on money owed to them. A statutory basis for such schemes would help remedy this. The Government know that extended collective licensing might not be appropriate for all types of works or rights, which is why it can be initiated only by a representative collecting society acting with the explicit support of its members. The Government would have no power to impose extended collective licensing on a sector. Collecting societies tend to be monopoly suppliers in their sectors, so members and licensees cannot simply shop elsewhere.
The clause and schedule introduce provision for the statutory regulation of collecting societies, where self-regulation fails. Any collecting society that fails to meet the Government’s minimum standards for self-regulation would be required to adhere to a statutory code of practice. Collecting societies would have to comply with specified criteria, including on compliance and enforcement. The Government welcome the progress that the industry has made on a self-regulatory framework. Self-regulation remains the Government’s preferred approach. The safeguard of enforceable minimum standards will help to ensure that collecting societies operate in a manner that promotes open and efficient markets. If it works effectively, the reserve power will not be used.
Noble Lords have raised a number of questions. My noble friend Lord Clement-Jones raised the issue of having to wait for the hub before undertaking extended collective licensing, and pointed out that we need extended collective licensing because we have the hub. Both schemes are designed to facilitate legal and properly remunerative use of works; they are two sides of the same coin. The fact that ECL-type schemes are already in use in the UK demonstrates that there is a need. ECL cannot be imposed on a sector; if rights holders prefer to use direct licensing through digital copyright exchange, the hub or another method entirely, that is their decision. The hub cannot act on orphan works without the legislation in Clause 68 in place.
My noble friend Lord Clement-Jones raised an issue that the noble Lord, Lord Stevenson, raised previously, on photographers suggesting that we delay the implementation of the orphan works directive until the October 2014 deadline, and then implement only to relieve any restrictions that the copyright hub failed to address. I understand the concerns behind this suggestion, but this is not an option because we need to implement the orphan works directive in full, and we cannot go outside the requirements of the directive without this clause. This means that no one, including the copyright hub, would be able to license orphan works without the power of this clause.
My noble friend Lord Clement-Jones, in a further question, raised the issue of foreign rights holders who would not be able to monitor what is going on in the UK. The collecting society must produce evidence with its application to show how it deals with those affected, including foreign rights holders. I hope that that answers his question. He also raised the question of FOCAL and BAPLA, which were unhappy with the ECL. Photographers do not have to have ECL—it is voluntary and can be initiated by the collecting society only with the consent of members, as I mentioned earlier.
I believe that my noble friend Lady Buscombe stated that extended collective licensing in Nordic countries is different and guarantees remuneration for rights holders. However, collecting societies in the UK must also show how they will find non-member rights holders and distribute money that is collected to them. I hope that that goes a little way to answering my noble friend’s question. I commend the clause to the Committee.
Lord Clement-Jones
“Greater protection for authors when assigning or licensing copyright
In paragraph 1(c) of Schedule 1 to the Unfair Contract Terms Act 1977, omit “copyright”.”
Lord Clement-Jones
Amendment 33 is inspired by the Creators’ Rights Alliance which feels that the contractual scales are very much weighted against it. I do not often make common cause with Consumer Focus but I am delighted that it supports the amendment. Its brief on the amendment puts the position rather well. It states that the Copyright, Designs and Patents Act 1988 makes creators the first owners of copyright, and that creators’ ability to assign or license their copyright to others is central to the overriding aim of copyright: that is, ensuring that creators benefit financially from their works. However, in the UK, creators frequently assign all their copyright for a one-off payment to intermediaries, such as publishers or record companies. Individual creators are frequently at a disadvantage when negotiating contracts with intermediaries, and some creators complain that they are unfairly pressured into assigning all their rights for a one-off payment.
The 2012 research of Consumer Focus found that 77% of British consumers expect that a fair share of the money they pay for music, films and e-books goes to the artists who created the work. The ability of the copyright system to ensure that creators receive a fair remuneration is central to public support for the principle of copyright. I agree with Consumer Focus that removing the copyright exclusion from the Unfair Contract Terms Act 1977 should be central to the Government’s efforts to build a fairer copyright system that supports economic growth and innovation. How about that, my Lords? Many creators work as freelancers or microbusinesses. They are the bedrock of the creative industries and deserve the protection provided by the Unfair Contract Terms Act. I beg to move.
Lord Stevenson of Balmacara
My Lords, extended collective licensing requires fair contracts. People who work in the creative industries are already seeing intensified efforts by many publishers and other intermediaries to coerce individuals who are sole traders into signing away all rights to their work. Those who succumb to this blandishment would be deprived of the income that the ECL provisions in the Bill are supposed to offer. Therefore, the failure of the Bill to include measures to level the playing field for negotiation of contracts undermines the purposes of copyright in promoting fresh creativity. These are not just matters of concern to professional creators, vital though it is to the creative economy that the possibility of making a living as a professional creator is defended. Every citizen has an interest in enforceable creators’ rights and fair contracts now that so many people are publishing and broadcasting their own works through social media.
There is a well known example of the problems that this can cause. In late 2012, the Instagram online photo-hosting service attempted to impose a contract of terms of service that would allow the company to sell users’ photographs to advertisers. This was defeated only after alert users boycotted the service. Legislation will be required to ensure that the price of creativity is not an eternal vigilance which distracts from the work of creation.
The issue of unfair contracts typically arises in two circumstances: “take it or leave it” contracts presented by large businesses to sole-trader professional creators, who are informed that no negotiation will be contemplated; and “click-wrap” contracts offered to those, professional or amateur, who use online hosting services to store or share their creations in words, music or images.
Amendment 33 would bring contracts dealing with copyright works within the terms of the Unfair Contract Terms Act 1977. This would remove an inexplicable exemption and allow at least some challenge to the contracts being foisted on many creative members. I support the amendment.
Lord Lucas
My Lords, I rise not least for the pleasure of supporting entirely what my noble friend Lord Clement-Jones and the noble Lord, Lord Stevenson of Balmacara, have just said. This is a very present problem in the way that the world is developing. We are getting some very large corporations controlling a lot of the flow of copyright material. The noble Lord mentioned the likes of Facebook but Amazon is just as bad, given the rights you are left with as an author as it moves into the publishing of e-books. If you put an e-book through to Amazon, you have to sign over to Amazon the entire control over what your work is sold for. The terms that it goes for are most astonishing. Generally, we need to remember that copyright is about enabling people to create and remunerating them properly for it, not enabling vast corporations to reap the benefits that we intend for the creators. I entirely support this change and very much hope that the Government, if not accepting this exact amendment, will see their way to doing something equivalent.
Viscount Younger of Leckie
My Lords, a change to the scope of the Unfair Contract Terms Act 1977, as envisaged by this amendment, would warrant considerable investigation and public consultation. For example, contracts governing copyright are specifically excluded from that Act. The Government would need to assess the potential implications of amending the Unfair Contract Terms Act to insert copyright within the scope of that Act. We believe that we understand the intent behind this amendment, which is to address issues surrounding contracts between individual creators and other businesses. However, it is unclear whether the amendment achieves this, since some parts of the Unfair Contract Terms Act would not apply to business-to-business contracts. I would be very happy to have further discussions on this complex matter with my noble friends Lord Clement-Jones and Lord Lucas, and indeed with the noble Lord, Lord Stevenson. I hope that in the light of the above, my noble friend Lord Clement-Jones will be able to withdraw his amendment.
Lord Clement-Jones
I thank my noble friend the Minister for that response. I think that is as good as it gets at this stage and I would very much like to meet him. The time has certainly come to look very carefully at this exclusion from the Unfair Contract Terms Act. There is a head of steam building up and it would be very useful to have that discussion. In the mean time, while looking forward to that discussion, I beg leave to withdraw the amendment.
“(2) The regulations may provide that, if a licensing body fails to adopt such a code of practice, any code of practice that is approved for the purposes of that licensing body by the Secretary of State, or by a person designated by the Secretary of State under the regulations, has effect as a code of practice adopted by the body.
(3) The regulations must provide that a code is not to be approved for the purposes of provision under sub-paragraph (2) unless it complies with criteria specified in the regulations.”
Viscount Younger of Leckie
The government amendments in this group are in response to the Delegated Powers and Regulatory Reform Committee’s 10th report of this parliamentary Session. Government Amendments 33A, 46A and 46B are intended to put additional safeguards into the Bill. In particular, Amendment 33A seeks to ensure that when a code of practice is put in place for a licensing body, it must comply with the criteria specified in the regulations. As the regulations will have been through the affirmative procedure, this gives parliamentary oversight of the code being put in place for a licensing body.
Amendment 46A makes it clear that all the provisions under sub-paragraph (1) are included, while Amendment 46B is intended to clarify that both the determination that there has been a breach and any related sanctions are subject to an appeal process. Amendment 46B, I should mention, gives effect to the intention behind Amendment 47, tabled by my noble friends Lady Buscombe and Lord Clement-Jones. Finally, Amendment 50A removes the power to make regulations which impose requirements on licensing bodies by reference to guidance.
I trust that these additional safeguards will reassure the Committee and demonstrate that the Government have listened to the recommendations of the Delegated Powers and Regulatory Reform Committee and have taken action. I will not at this point speak to the amendments in this group that other Peers have tabled. I will instead wait to hear what they say, but I beg to move Amendment 33A.
Baroness Buscombe
My Lords, I thank the Minister for bringing forward the series of amendments in this group and for his explanation. Although the government changes to Schedule 21 are to be welcomed, I suggest that the Government could edge even closer towards improving the Bill yet further. Briefly, I should like to respond to the government amendments and then introduce those in my name; namely, Amendments 34 through to 51, excepting Amendment 49, which is in the next group.
Amendment 33A responds to the concerns of the 10th report from the Delegated Powers and Regulatory Reform Committee. Its concern, as we have already heard, was that the Bill will allow the requirements of the default code, enforced by penalties, to be imposed or revised without parliamentary scrutiny, given that failure to comply may lead to sanctions. Equally important as parliamentary scrutiny, in my view, is the fact that it is indispensable that the code criteria should be subject to consultation by interested, informed parties. That would be the effect of my Amendments 43 and 51.
I very much welcome the Minister adding his name to Amendment 46, which I tabled. That will help to ensure that the regulations must now set out the process for determining non-compliance, determining the type or size of the sanction and for providing a right of appeal. I also welcome Amendments 46A and 46B. As financial penalties will ultimately be borne by the collecting society’s members, fines should be imposed as a last resort. A right of appeal is essential. Also Amendments 50A, 51A and 51B are welcome additions to the Bill.
I turn to the series of amendments that I have tabled. Although the government amendments put forward are very welcome and a big step in the right direction, my amendments address separate issues which, with respect, still need to be considered. The purpose of these amendments is to provide even greater clarity in the Bill for Schedule 21, which would help to ensure that the Bill meets the stated aim of fostering successful self-regulation. The effect of the changes would be to reduce the considerable uncertainties surrounding future regulations because the powers currently provided for by this legislation are simply too vague, even with the Government’s latest amendments.
Collecting societies have invested considerable time and money in adopting and operating voluntary codes of conduct. PRS for Music introduced a voluntary code of practice for licensees as far back as 2009 and then one for its members in 2010. Many other collecting societies have followed suit. The British Copyright Council’s Principles for Collective Management Organisations’ Code of Conduct, known as the BCC principles, are important to reference here, as many of these codes of conduct for members and users comply with these guiding principles, which have at their heart a commitment to transparency, accountability and good governance. I suggest that those are all good Conservative principles.
These collecting society voluntary codes also have regard to the Government’s recently published minimum standards for collecting societies and, therefore, include an independent complaints review ombudsman. Independent adjudication of a complaint is obviously an important feature of any sensible self-regulatory system. Those BCC principles also include provision for an independent code review process. This first such review is intended to start in November 2013. In short, the principles of good self-regulation are established and are generally being operated successfully by collecting societies.
Amendments are necessary to the Bill to make the path from voluntary to statutory regulation much clearer than is currently outlined in the legislation. It is only reasonable, I suggest, to give businesses the certainty that they deserve. After all, it is a big step to move from self-regulation to underpinning with state regulation.
First, it should be clarified that the majority of the powers in Schedule 21 are exercisable only in a scenario where it has been adjudged through a fair, robust and transparent process that there has been an unremedied failure of self-regulation. The imposition of a statutory code, and/or any statutory appointment of an ombudsman or code reviewer, will lead to significant additional costs and potential exposure to penalties, and should therefore be imposed only when it is clear that self-regulation has failed. Collecting societies need to have visibility of what triggers the imposition of statutory regulation so that they are not left in the dark about whether they are close to or far from crossing the line.
Equally, given that collecting societies are already offering, or on the point of offering, ombudsman dispute-resolution services and providing for a code reviewer, the regulations should also make it plain under what circumstances the Secretary of State would appoint a statutory ombudsman or code reviewer. Amendments 34 and 50 serve to clarify the processes and specific circumstances that would enable the Secretary of State to impose such regulation.
Improvements to the Bill can also be made so that the penalties for non-compliance much clearer and more proportionate. This is why I am proposing Amendments 44, 45 and 48. The Bill provides for sanctions in case there is failure to abide by a code. These sanctions include financial penalties that may be imposed on directors and other personnel. The highest fine stated in the legislation is £50,000. Under the Companies Act 2006, penalties on individuals arise in relation to very specific failures. Codes of conduct are typically of a general nature. I therefore believe it is unacceptable to impose personal liability and financial penalties for undefined offences that are less specific than UK company law.
Let us remember that all collecting society revenues are distributed to members after management costs are deducted, and fines are therefore a direct penalty on the membership itself. Any fines would be paid for by the members of the collecting society. There is a strong argument that fines on societies should be imposed only as a last resort. Instead, it would be more sensible to provide appropriate help or assistance to a society that has been deemed to have failed, as opposed to simply punishment.
I have also tabled Amendments 35 to 42, which are effectively technical. Paragraph 3 refers to a licensing code ombudsman. Codes of practice typically govern a collecting society’s relationship with its members and its licensees. I propose that the phrase “licensing code” should be deleted because it is not appropriate.
Let me conclude by saying that we should not forget that compliance with regulation is costly; and, ultimately, the resources which are devoted to regulation must in effect be paid for by the creator members themselves. It is entirely reasonable that the penalties for non-compliance are clearly set out and proportionate. This Government support the principle of good self-regulation; they should therefore take this opportunity to do just that and reduce the uncertainties provided for by the current drafting.
Lord Clement-Jones
My Lords, I rise briefly to support my noble friend Lady Buscombe. In fact, while she mentioned good Conservative principles, I can pray in aid of self-regulation good Liberal principles. The essence of the issue is that these should be backstop powers, and as she said, we should be fostering successful self-regulation. It is important that there is as much transparency and clarity about these rules as there is in UK company law. Some of the sanctions could be just as high as those in UK company law and, of course, they will ultimately be borne by the collecting societies’ members, and a right of appeal is essential in those circumstances. I thought that my noble friend argued eloquently for why we should be aiming for that kind of regime.
Lord Young of Norwood Green
My Lords, these government amendments, brought forward in response to the DPRRC recommendations, put flesh on the points that we made in respect of the previous group. As we said, we support the introduction of measures to deal with orphan works and believe that extended collective licensing is the way forward. We also want to see the copyright hub being developed, as we have said. These amendments go some way towards ensuring greater clarity over the standards to be set for collecting societies and transparency in how the powers that the Government are taking will operate in practice, and we are happy to support them.
The amendments proposed by the noble Baroness, Lady Buscombe, aim to put more detail into the Bill on how the Government intend to supervise collecting societies and on what might constitute the minimum conditions and procedures that might be required, which would ensure that the Government can step in and require a body to adapt the Government’s standards for collecting societies. I shall listen carefully to what the Minister says in response to the amendments proposed by the noble Lord and the noble Baroness, but at present we take the view that much of what is requested is more appropriate for secondary legislation.
I take the opportunity to say, as somebody who spent a few months of my life dealing with the previous Digital Economy Bill, of which orphan works were a part, but they unfortunately disappeared in the wash-up process, it is nice to know that at long last we seem to be getting near to liberating orphan works for the collective benefit of society as a whole. I welcome the Minister’s comments.
Viscount Younger of Leckie
First, I appreciate the general support of the noble Lord, Lord Young of Norwood Green.
On Amendments 34 and 50, there is already provision in the Bill for consultation before the appointment of a code reviewer. We have considered the proposals to put all processes for the appointment of an ombudsman and the implementation of a statutory code on the face of the Bill. However, the Government, together with stakeholders, need to learn how the schemes work in practice and respond as they evolve. This will help us quickly to remedy any unforeseen issues that result in problems or injustices for rights holders. We have considered Amendments 35 to 42 carefully and believe that the term “licensing code ombudsman” more accurately describes the functions of the role. That role is to investigate and determine disputes about a collecting society’s compliance with its code of practice.
On Amendments 43 and 51, as I noted with regard to Amendments 34 and 50, the Bill already makes provision for consultation when appointing a code reviewer. This is important to ensure independence of process. Codes of practice will be subject to specific criteria, which will be set out in regulations subject to consultation. Therefore, the Government do not consider that additional consultation is necessary.
We have spent some time looking at Amendments 44 and 45 on the power to impose sanctions on individual directors. Where it can be demonstrated that a director is responsible for non-compliance with a code, it is only right that they should be sanctioned. The default should not be to penalise collecting society members. The Government agree with the intent behind Amendment 46, which is consistent with the comments made by the Delegated Powers and Regulatory Reform Committee. Therefore we accept this amendment.
On Amendment 47, I confirm that an appeal mechanism will be available for decisions on non-compliance and for any resulting sanction. This was earlier clarified in government Amendment 46B.
Finally turning to Amendment 48, the Government can confirm that these fees will apply only to a licensing body being regulated. If a licensing body adopts a code of practice which complies with the criteria specified in the regulations, no fees arise in connection with paragraph 1 of the schedule. In addition, paragraph 6(2) of the schedule contains a protection for licensing bodies, limiting the aggregate amount of fees payable for administration and operation of the regulations.
I shall respond to a number of questions raised by noble Lords. In her general comments, my noble friend Lady Buscombe raised the code criteria, which should be subject to consultation. Although I may well have covered this in my previous speech, the code criteria will largely be based on minimum standards on which there will already have been consultation. Specified criteria will be part of the regulations and will be consulted on.
In her general comments, my noble friend Lady Buscombe also raised the work done by the collecting societies on self-regulation. The Government welcome the work they have done and what they have achieved. I repeat that self-regulation is the preferred option, but we need a back-stop if it fails, a protection for licensees and members when dealing with monopoly suppliers. My noble friend Lady Buscombe also said that fines should be used only as a last resort. I entirely agree that they should be a last resort. We do, however, need an ultimate sanction, and fines would provide that.
My noble friend Lady Buscombe also mentioned collecting society revenues which are distributed to members, who are affected by fines, instead of giving help to failing collective societies. I agree with her; this is why, if a director is responsible, he or she, rather than the collecting society members, should be held accountable. Finally, my noble friend Lady Buscombe asked what triggers statutory regulation. The provisions for an independent code reviewer, who will independently assess the performance against the code, are the trigger. I hope that I have answered all the questions raised by noble friends and, if not, I will certainly write to them.
Baroness Buscombe
My Lords, I thank the Minister for his explanation of the various amendments to which I have spoken today. Of course, I want to think about what he has said, but the confirmation of an appeal mechanism is very welcome. I am always concerned about leaving too much to regulations. I remember that when we were in opposition the previous Government too often left so much to regulation, and we always complained about that. I find now that we are in a similar situation. It all comes down to certainty and clarity, hence the main purpose behind the amendments we have tabled. It is a huge step to go from pure self-regulation to having a back-stop power. I think it is right to say that the industry in large part does not oppose that back-stop power in principle. It is asking for as much certainly and clarity as possible and for the Government to recognise the work the industry has done and is continuing to do to put and keep its house in good order, so that creators and the works that they do are protected, and properly so.
We welcome the Minister’s support and understanding of the position of creators and their concerns in this regard. For my part, I think that the key to successful self-regulation is that all the parties involved in it are positive and buy into the system. It works extremely well as long as there is no uncertainty or a spectre of what they would deem unfair or disproportionate state interference. So often, the bottom line is that state interference leads to delay and cost. Just as within any court of law, delay and cost never produce a happy outcome, even for the person who comes out on top. It is not a happy resolution, and that is why I also referred to dispute resolution. I am pleased that the Minister has said that the Government want to be seen to be helping the industry as opposed to coming in with something of a cosh to deter those working in the industry doing the right thing or feeling that what they are doing is worth while and is properly protecting their members.
I do not want to delay this further, so I thank the Minister for his supportive comments. I will take his thoughts away and consider further whether we should come back on Report with further amendments, just to provide certainty in the Bill.
Baroness Buscombe
Baroness Buscombe
Baroness Buscombe
My Lords, Amendment 49 relates to the jurisdiction of the Copyright Tribunal, which we feel needs attention. The Copyright Tribunal is a creature of statute; its powers and jurisdiction are defined in the Copyright, Designs and Patents Act 1988. It has the power to rule on private rights, so we believe that there should be full parliamentary scrutiny for changes to its jurisdiction. Paragraph 7(2) says that regulations may change the jurisdiction of the Copyright Tribunal, but it should be made clear that this is only in relation to the powers in the schedule and not more widely. I am proposing to tighten the drafting accordingly. I beg to move.
Lord Young of Norwood Green
These amendments, which relate to collecting societies, are sensible measures. Clearly, the bodies should act in the public interest and it would be outrageous if they did not have rights holders on their governing bodies. I am sure that the Government will say that this is detail for secondary legislation and they may be right, but for what it is worth we support the noble Baroness.
Baroness Brinton
My Lords, Amendments 56A and 56B would require the Government to ensure that regulations governing collecting societies required them to have user representation on their governing bodies if they wanted to grant extended collective licences. This is born of frustration with the operation of some collecting societies, which in effect already grant extended collective licences—the CLA, for example.
As has been mentioned, the societies are in a monopoly position. Universities negotiate licences with the CLA for the use of books, journals, magazines and so on. They have no alternative. If they do not like the terms of the licence that they are being offered, the only thing that they can do about it, once negotiation has been exhausted, is to go to the Copyright Tribunal, a very expensive and time-consuming process. If collecting societies are to get extensive new rights to offer licences for works which have not been produced by their members, they should also have new duties to act in the interests of their stakeholders and users and ensure that the public interest is also served.
It is important to bear in mind that a large volume of the work we are talking about here will never have been produced with financial returns in mind. It would be wrong for collecting societies representing these works to seek to maximise the commercial return on this kind of material. They should balance the interests of their members, the majority of whom will want financial return for their work with the interests of the producers of the unrepresented work which may not be financial at all.
These amendments are obviously intended to probe the Government and I will be interested to hear the Minister’s views.
Viscount Younger of Leckie
My Lords, I shall begin with Amendment 49. I can confirm that it would not be possible to make unconnected changes to the jurisdiction of the Copyright Tribunal under the power in Schedule 21.
Turning to Amendments 56A and 56B, I can assure the Committee that the proposed schemes already take account of the range of interested parties affected by them. Let me explain how. First, on extended collective licensing, the Government intend that the regulations will allow any affected party the chance to comment on a collecting society’s application before a final decision is reached. A collecting society authorised to grant licences must take into account the interests of affected parties including its members, its licensees and non-member rights holders. These obligations are required to be in the collecting society’s code of practice. An independent code reviewer will measure performance against these obligations. Where there has been an alleged breach of a code, rights holders and licensees will have recourse to an independent ombudsman.
Turning to orphan works, the orphan works authorising body is independent and will not be able to license itself. I submit that this is a stronger safeguard than that proposed by these amendments. The Government concur that representative rights holders, wherever possible, should be on the governing body. In practice, this will not always be possible with some types of orphan works, for example, old diaries, correspondence and other material never intended for publication or commercial use.
I would like to clarify an issue which was raised by my noble friend Lady Buscombe concerning Amendment 49. Any changes to the jurisdiction of the tribunal should be subject to full parliamentary scrutiny. All regulations, including changes to tribunal jurisdiction, are now subject to the affirmative procedure.
The Government have carefully considered these amendments, and I hope that in the light of my response my noble friend Lady Buscombe feels able to withdraw her amendment.
Baroness Buscombe
My Lords, I think the Minister said something slightly different at the beginning. Perhaps this is something I should take away and think about a little more, because I think I have been given different advice than the Minister. Rather than saying that I am grateful to the Minister and all is well, I hope he will allow me to take this away just to be sure that the advice I have received has clearly been wrong. It is important that we should make it clear that this change is only in relation to the powers in the schedule and not more widely. If that is not possible in the Bill, then I will accept what the Minister has said. I beg leave to withdraw the amendment.
Lord Mitchell
“(2B) The regulations must require the inclusion of information regarding the ten highest paid and ten lowest paid employees in the company outside of the board and executive committee.”
Lord Mitchell
My Lords, in addressing this section of the Bill, I should like to say a few words. I am very conscious of the fact that this is most definitely not a Second Reading debate, but I want to give a little perspective before I get to the main issue.
The amendment deals with directors’ remuneration, a subject which has had a lot of intense coverage in the media. Before we get to the nuts and bolts of the various amendments to which I have added my name, it might be useful if I set out some of the background to our thinking on this issue. I should say at the outset that we are very encouraged that shareholders, particularly pension funds and investment funds, are taking a much more proactive position on this issue. I know it is stating the blindingly obvious but it is the shareholders who own the company and it is they who risk their investment when they buy into a company, yet for too long they have been ignored.
I have to recount a ghastly story about Goldman Sachs that I read some time ago before the financial crash. The story goes that senior management in that company in the United States would look at their profits, decide how much reported profit they needed to keep Wall Street and the shareholders happy, and then divvy up the balance between themselves. I do not know whether that story is true but I am sure that some people take that approach: that is, senior executives act as if they own the company and believe that it is up to them to decide how the pie is sliced, but that is not the way things should be done. To its credit, this month Goldman Sachs responded to the outcry when it agreed not to delay bonus payments in this country in order to gain from the lowering of higher-rate income tax in April. I think that was a good result. Sadly, not all companies have followed the example set by Goldman Sachs. For example, I am told that Tullett Prebon intends to delay bonuses until April. It is on this company’s board that the BIS Minister, Michael Fallon, used to sit. That is not a good example of best practice.
As some noble Lords will know, my background is in IT. For all the faults of that industry, I think it is fair to say that instant gratification by way of monster remuneration is not the norm. By and large, it is about share ownership and share options. The late Steve Jobs was famously known for receiving an annual salary of $1 a year. We have spoken about Amazon today but the owner and founder of that company, Jeff Bezos, also receives a basic salary of less than $100,000—that is, less than a Member of Parliament. I know that in those companies, both those entrepreneurs were already wealthy men but for them it was never about raiding the kitty; it was about capital growth and the long term. Does that not send a positive message to their employees? Their priority is the customer, the product and the service. Get that right and the rest will follow.
It is with much dismay that I see the very opposite in many other sectors of the business spectrum. This very week, we read that RBS intends to divvy up £250 million by way of bonuses, plus a likely fine of £500 million to the US authorities—this is a separate issue—for the bank’s manipulation of the LIBOR market. This bank, where people have been lucky to avoid criminal prosecution for fixing markets, is one that we own and what is going on is simply wrong. This very day, we read about the very same actions being taken by Barclays, a bank whose record is less than perfect. These executives grab all they can when their company’s trading record is poor and where the shareholder value has remained at rock bottom. Being paid to fail does not sound right to me. In even more disturbing news this morning, the FSA has come out and criticised the mis-selling of complex interest swaps, which particularly hit SMEs that were, in many cases, ill equipped to evaluate their risk and were relying on the good name of the banks that sold them the product. I am not saying that what the FSA has done is disturbing; what it has done is really good, but the practice that was going on is disturbing.
When they come back, what do these well paid executives say? “It is a global employment market. If we don’t get top dollar, we will go somewhere else or to some company that will pay us”. You hear that all the time. The FT hints that RBS executives are threatening it. You can use any word you like to describe this kind of behaviour; my word is blackmail. It is what Premier League footballers do. My advice to anyone who is faced with this gun to their temple is to call their bluff. My experience in business is that no one is indispensable. Just below the great man—and now, increasingly, the great woman—you can bet your boots that there is someone who can step up to the plate.
My party wants fairness and balance. It is worth noting that if the minimum wage had been increased to reflect the average remuneration of FTSE 100 CEOs, the minimum wage would now be at £19 per hour. Instead we have this growing disparity, especially in London where so many leading companies are based and where, in 2011 alone, the top percentile received a 16.5% greater increase than the bottom percentile. Put simply, too many are being left behind and bringing this imbalance back into balance is exactly what my party’s one-nation philosophy is all about. That is the background but let me repeat: we have no problem with high pay. However, we have a problem when this pay is set by a cohort of good old boys who look after each other’s interests. The solution is to make pay transparent and to ensure that remuneration policies are set via the board, in consultation with independent experts and with the shareholders’ explicit approval.
The amendment which I am addressing first, Amendment 58BA, deals with the top 10 and bottom 10 earners in a company. This amendment aims for greater transparency on pay across the whole of the company, so that shareholders have more information when they come to make decisions on pay. It requires that the salaries of the top 10 highest earners in a company, outside the boardroom, are disclosed in a similar fashion. No doubt companies would choose to do this in an anonymous form, with lists of pay bands and the numbers of employees who fall into each band. This would be entirely acceptable and is good practice. Indeed, I have prepared such lists for companies that I have been involved in, where I have been chairman of a public company. It is also the practice in the United States. In some sectors, particularly the banking sector, very high earners exist outside the boardroom, which is why shareholders need these figures for context.
Baroness Turner of Camden
My Lords, I support my noble friend on this amendment. I sat through the earlier discussions which were not within my particular area of involvement but this certainly is. Of course, transparency is very important in employment relations. My noble friend has just said that my party has no problem with high pay, but we all have problems with low pay. Taxpayers have problems with low pay because it involves the Government paying out welfare. That is the sort of problem that shareholders should be forced to face from time to time, and would be bound to do so under the terms of this amendment. Therefore, I hope that the Government will understand that this is in line with good practice, that it operates throughout the best part of English commerce and industry and that it is something that we should have in the Bill. I hope that the Government will feel inclined to support it.
Viscount Younger of Leckie
My Lords, noble Lords are very familiar with the arguments in favour of action on directors’ remuneration in quoted companies. In my opening remarks, I will be echoing many of the sentiments expressed by the noble Lord, Lord Mitchell, and particularly picking up on the transparency aspect, as expressed by the noble Baroness, Lady Turner.
Over the past decade, directors’ pay packages have risen on average by 13% per year, while the value of many of the companies they run has remained broadly static and workers’ wages have risen at a much slower rate. Business and investors recognise that this disconnect between pay and performance is damaging and not in the long-term interests of the economy. As Sir Roger Carr, president of the CBI has said:
“Now is the time to be more transparent, more responsible and more accountable”.
It is not government’s role to micromanage company pay, but there are actions that we can take to address what is a clear market failure.
Eighteen months ago, the Government initiated a broad, national debate on this issue. This has encouraged shareholders to become more engaged as owners of companies during the so-called shareholder spring. In 2012, several firms saw their remuneration reports voted down, including big companies such as Aviva and WPP. We have also seen many companies taking the initiative and engaging constructively in response. This is an important step for encouraging more responsible paysetting.
The Government’s reforms will build on this, and promote better engagement between companies and shareholders. By giving shareholders clearer information about what directors are paid and binding votes on pay policy, shareholders will be better equipped to hold companies to account. Business and shareholders agree that this comprehensive package of reforms strikes the right balance. It will promote a stronger link between directors’ pay and company performance but avoid placing unnecessary or inappropriate burdens on companies. The head of the Association of British Insurers has said that these proposals,
“are practical, workable and should help tackle excessive executive pay”.
The amendment requires that companies report on high and low pay outside the board. The issue of high pay below board level is most prevalent in the financial services industry because poorly designed remuneration structures can incentivise excessive risk-taking—a point alluded to by the noble Lord, Lord Mitchell. The Government are committed to improving remuneration disclosure in banks and achieved progress on disclosure below board level as part of Project Merlin. At the same time, Europe has proposed bringing in its own disclosure rules. We await the outcome of these negotiations before deciding on how to proceed with any domestic proposals for disclosure below board level at banks. The Government will argue strongly for the right outcome and remain committed to ensuring that the UK has a transparent and comprehensive remuneration disclosure regime for all companies, including the financial services sector.
However, we do not believe that high pay below board level is a major issue in other sectors. Through our consultations with investors, we learned that there is no demand for such a disclosure, which, if adopted, would place an unnecessary regulatory burden on companies.
Regarding the pay of employees more generally and how directors’ pay compares to that of lower-paid workers, the Government recognise that this is an issue of concern for shareholders, employees and the public in general. We want remuneration committees to consider the broader context when setting top pay. That is why, under government proposals, companies will have to say more about how they have taken into account pay of employees at all levels, and publish the percentage increase in pay of the chief executive officer compared to that of the workforce.
Last year, we published a draft of the regulations that will implement these proposals. These regulations will determine the content of remuneration reports in future. We invited people to comment on the draft regulations and a copy is available in the House Library. Noble Lords will have the opportunity to debate this matter thoroughly later this year when these regulations are brought forward.
Amendment 58BB would mandate that regulations prescribing the content of directors’ remuneration reports must require companies to disclose information about fees paid to remuneration and recruitment consultants in respect of directors’ remuneration. Noble Lords will be aware that the Secretary of State already has the power to require companies to disclose this type of information in the directors’ remuneration report and that we have published draft regulations that would give effect to this. Under these proposals, companies would be required to explain how consultants have been appointed, what services they have provided and how much they have been paid. By way of an update for the noble Lord, Lord Mitchell, we invited comments on these draft regulations and are currently considering the responses.
The noble Lord, Lord Mitchell, rightly drew attention to pay in banks, which I alluded to in my remarks. However, it is worth re-emphasising that high pay outside the boardroom is most prevalent in financial services, and we want to see greater scrutiny of how senior executives in large banks are incentivised because their behaviour can have a material impact on a firm’s risk profile. That is why we have committed to extending pay disclosure in large banks to highly paid non-board executives. This would mean that the UK had the most transparent bank pay of any major financial centre, but we do not propose to apply this in other sectors, as mentioned earlier, where it is less relevant. We consulted on this and found that there was no demand from investors for this extra information. Indeed, it would be an unnecessary extra reporting burden on companies.
I thank the noble Lord for raising this issue, but I suggest that the amendment is unnecessary, given that the Government already have the power to do this and have proposed considerable action in this area. I therefore ask the noble Lord to withdraw the amendment.
Lord Mitchell
I thank the Minister for that reply. I think we are not too far away in our philosophy and in what we would like to do in this section of the Bill. What we are suggesting would perhaps give the Bill a little more bite than it has at the moment. It is something we need to think about. My instinct is that we need to pursue these amendments.
I shall say one thing in particular. I do not understand why non-financial companies are not part of this. If I were a shareholder, I would like to know this information, even if it were—to name one company—WPP, which is not in financial services. There are many companies out there that pay pretty massive salaries, and I do not understand why they should be excluded from this. The Minister said that consultation with the investment community showed otherwise, but for all of us who invest in companies, this is key information that we should have. I hope the Minister takes into account what I have said. I beg leave to withdraw the amendment.
“(1A) A representative of the company’s employees must be consulted in the preparation of any such revision.”
Lord Young of Norwood Green
My Lords, I listened carefully to the previous debate because there is a link. I concur with the comments made by my noble friend Lord Mitchell. He referred to investors investing in the company. I shall preface my remarks by saying that so do employees. For the most part, it is the whole of their livelihood, so it is just as important an investment as that made by shareholders. I submit that whether employees feel that they are committed and are working as part of an organisation that values their contribution is relevant to the success or failure of a company. There is also a perception within the company that there is fairness in the remuneration policies that apply.
I am sure that the Minister will not necessarily welcome this amendment, but I would love to be proved wrong. What would an employee representative bring to directors’ remuneration? What would their strategy and policy be? They would bring a different, fresh perspective and one that I would submit many companies need. My noble friend Lord Mitchell pointed out the huge rise in the ratio of top and bottom pay in companies over the past 20 years or so. In some cases, one might argue that there was a justification if they were rewarding success, but in many cases we are seeing failure rewarded just as much as success. In my experience of pay negotiations over a number of years, there was nothing that contributed more to a feeling of resentment than situations where the workers were told that the company could afford only X% for them but, when it came to the pay of directors, they somehow deserved double or treble. The argument is often made that they bring these special skills or talents: I am just as sceptical about this as my noble friend Lord Mitchell.
Viscount Younger of Leckie
My Lords, I concur with the noble Lord, Lord Young, in his interesting remarks that the interests of employees are important as a company cannot excel, or indeed properly function, without a workforce that is committed, motivated and content. This includes being content with their remuneration package in relation to their peers and superiors.
I should also like to pick up the point he raised concerning companies taking into account employees’ pay and their views. He is quite right: in revised remuneration reports, companies will now have to say whether, and if so how, they have taken into account employees’ views on executive pay and policy. In addition, they will have to publish the percentage increase in pay of the chief executive officer and that of the workforce, as I mentioned earlier. These will be discussed in more detail when we debate the regulations.
Amendment 58BC would require companies to consult an employee representative if they propose to change their remuneration policy before the next AGM. The Government agree with the view that it can be useful for companies to engage with their employees when considering directors’ pay. It is important that remuneration committees make their decisions based on a broad range of reliable and robust information. We know that some companies are already doing this and we want to encourage more to do so. That is why we have proposed that, in their annual remuneration reports, companies disclose whether, and if so how, they have sought employee views. They must also say how they have taken employee pay into account.
We also encourage employees to take up existing mechanisms to air their views, such as information and consultation arrangements, employee representative committees and works councils. However, we do not believe that it is necessary to create a statutory duty to consult employees on this matter. It is up to companies and their shareholders to decide whether, and if so how, to go about it. I therefore ask the noble Lord to withdraw Amendment 58BC.
Lord Young of Norwood Green
I thank the Minister for his comments, some of which I found helpful. I will read the points he has made carefully in Hansard. Some of them were a step in the right direction and we will consider whether they have gone far enough. I beg leave to withdraw the amendment.
Lord Mitchell
Lord Mitchell
My Lords, this group of amendments is about accountability. We will be going over some of the area we have discussed before, but some of the points need stressing. Again, the issue is about putting power back into the hands of the shareholders.
Amendment 58BD, where we intend to change the word “ordinary” to the word “special”, talks about the type of resolution that would be necessary to get through any changes in the principle. We feel that a special resolution, which would be 75% of the shareholders, gives it a greater importance as far as the company is concerned and makes any changes to the principles of remuneration that much harder to make.
The current arrangements for backward-looking votes have given some power to shareholders, but have not sufficiently empowered them. While we welcome the changes, we feel that more could be done. In 2012, at the height of what became known, as the Minister said, as the shareholder spring, there were significant votes against directors’ pay, such as those at Aviva, Barclays and William Hill. The most memorable was the voting down of a 30% pay increase for Sir Martin Sorrell at WPP.
However, from 2011 to 2012, there was an increase in executive pay to the tune of 12%. By comparison, the rate at which pay increased for everyone else averaged 2.8%. Only 12% of the country received a pay increase of more than 4%. Needless to say, there was no rise in share price to equate with that 12% jump in wages, and nor would one be expected. In the past 10 years, FTSE 100 executive pay increased by 300%, while the FTSE 100 index has increased by 48% and, more devastatingly, fallen by 8.1% in the past five years.
It is far more difficult for shareholders to organise today than it would have been in the past, mainly because ownership is so global. Indeed the Kay review into the effect of UK equity markets on the competitiveness of UK business pointed out that the increase in foreign ownership has made it much more difficult for a disparate group of shareholders to organise and collaborate. In 1981, the percentage of shares in UK-listed companies held outside the UK was 3.6%. Today the figure is 41.5%—a dramatic change. Shareholding is also often a much more short-term affair than in the past. In 1998, the average holding in US and UK banks was around three years. Ten years later it had reduced to three months. It is probably even less today.
With that in mind, shareholder protest should be reconsidered. If 40% of shareholders in a company combine to oppose a remuneration report, it is a hugely significant development showing a deep level of dissatisfaction with company policy. Indeed the Government’s consultation in March appeared to acknowledge precisely this problem. Under the proposed rules, however, it would be possible for a company to ignore the report. The amendment would rectify that.
I want to address the question of an annual vote, which, of all the issues that I am addressing, we feel very strongly about. Our amendment is also about empowering shareholders. It proposes an annual binding vote for shareholders on a company’s remuneration policy, as opposed to a three-yearly binding vote. Having such a vote will ensure that executive pay is a matter that directors have to engage with regularly and will ensure that the issues around it are kept in mind. It would not be a difficult requirement to comply with, and I do not imagine that businesses will find much difficulty in doing so. This is because there are already many reporting requirements on an annual basis. Indeed the triennial approach, while a well thought-out idea, probably loses sight of that fact. The idea of a binding annual vote on pay has broad support. Indeed, it is again the case that the Government’s consultation in March seemed to suggest that it was their preferred approach.
In this case, there was every indication that Vince Cable and the Government initially supported an annual vote, but then performed a U-turn once it became apparent that pressure had been applied to them by large firms—yet another example of this Government talking big and acting small. A Financial Times editorial piece on the subject said of directors:
“Annual votes would at least put them firmly on the spot. Mr Cable’s triennial polls, however well-meaning and thoughtful, may not”.
This is not to be confused with my party advocating short-termism. We believe that in many cases pay has been thought about with too short-term an approach. The triennial vote actually reflects that to a certain extent, as for many companies, three-year share options are thought of as long-term. However, that is for companies themselves to think about. What the annual binding vote would do is ensure that whatever remuneration policy is chosen, shareholders have the power to hold it to account. I beg to move.
Lord Razzall
My Lords, this is clearly a serious issue and the noble Lord, Lord Mitchell, is right to use this opportunity to get the issue debated. I do not wish to delay the Committee for too long on this point, unlike some of my colleagues, but the point ought to be made that while the noble Lord is of course right that the Secretary of State’s initial position was to look at annual binding votes, one of the objectives of consultation on these issues is to try to arrive at a consensus. It looks as though a consensus about the triennial proposal has been found that gets both the TUC and the CBI on side. That is a significant achievement, given that this is a tricky issue. The initial position could have been significant hostility from one side to the other, whatever the Secretary of State’s recommendation had been. It should be noted that the compromise was well negotiated between the two positions. It is not often that the trade union movement and the CBI can be got to agree on something so complex.
Viscount Younger of Leckie
My Lords, Amendments 58BD, 58BF and 58BG would make the vote on remuneration policy a special resolution, requiring companies to secure the support of 75% of shareholders to pass. The level of support required for remuneration resolutions is a matter that the Government have consulted on extensively. The vast majority of investors agree that the vote on pay policy should remain an ordinary resolution. They would be concerned if a minority of shareholders could overturn the views of a majority. In cases where voting turnout is low, it would take only a small number of activist investors to reject the pay policy.
Investors have welcomed the Government’s decision to keep this as an ordinary resolution. They have shown this year that a majority of shareholders are often willing to vote against egregious pay policies. In 2012, we saw a succession of companies lose the vote on pay policy with at least 50% opposition from shareholders, as the noble Lord, Lord Mitchell, said. Special resolutions should be reserved for rare issues that have a major impact on shareholder rights or company value, such as recapitalisation or changing the articles of the company.
However, the Government agree that companies should have to take action when a large minority of shareholders reject a remuneration resolution, even if legally it has been passed. Therefore, the Government welcome the Financial Reporting Council’s commitment to look at whether companies should formally respond when a significant number of shareholders vote against a pay resolution and to consult on this being in the Corporate Governance Code.
Amendment 58BE would remove the requirement for companies to put their remuneration policy to a shareholder resolution at least every three years—triennially—and instead require that this is done annually. We considered that carefully when consulting with investors and companies. They welcome the option of a three-year pay policy, which encourages companies to plan for the long term and discourages them from making annual tweaks to pay packages. Investors agree that this will help to put a brake on annual pay ratcheting.
Major investors and investor bodies, including the Association of British Insurers, have backed this approach. The ABI has said that it will,
“help the task of keeping executive pay proportionate and aligned to corporate strategy”.
Of course, companies can choose to have an annual vote on pay policy and will be required to if they make any change to it. However, if the policy remains totally unchanged, it is an unnecessary burden on both companies and shareholders to require a vote on it.
We have, however, built in a safety net. Shareholders will continue to have an annual advisory vote on how the pay policy is being implemented. If they are not satisfied, they can oppose the advisory vote and this will trigger a requirement to have a binding vote on the pay policy at the next AGM. Shareholders also have the existing right to force a resolution at an EGM. That means that shareholders could force an annual binding vote on remuneration policy, should they wish to.
The noble Lord, Lord Mitchell, asked whether the high-profile votes against pay last year were a flash in the pan. As he said, last year we saw several such votes against high pay—he cited some examples—which were a step in the right direction. We are pleased that shareholders and businesses are increasingly working together to sort out pay issues, but it will take more than one year to do so. The government reforms will come into force in October this year and will give shareholders more power to push for change. Looking further ahead at least 18 months, if we see less public anger over pay because companies have sensible pay packages, we will have gone some way towards succeeding.
The noble Lord, Lord Mitchell, echoing remarks made by my noble friend Lord Razzall, raised the recent Kay review, and I am grateful to noble Lords for their welcome of that review on how to encourage a more long-term view in our equity markets. This is one of the reasons why, after consultation, we considered that a three-year vote best enabled us to focus shareholders and directors on the long-term value of the company.
Given the wide support for the approach that the Government have taken on this issue, I ask the noble Lord to withdraw his amendment.
Lord Mitchell
My Lords, I thank the Minister for his comments. We are perhaps a little further away from each other than we were on the previous amendments. As the noble Lord, Lord Razzall, said, it is some event when the TUC and the CBI come together on such a key issue, but we still feel that the annual side of this is an important issue.
I shall deal with the special resolution and the 75%. It is part of what we are saying about the need for this issue to be treated as important. In the next round, we would probably want to keep it as it is, but I will think about it. As for the annual side, and the request that it stays on a triennial basis, every single year at annual general meetings a series of issues go through, such as the approval of auditors and accounts. I do not see any reason at all why there should not be an approval of directors’ remuneration principle and package; it should slot in: one; two; three. I am sure that is the correct way for it to be. It does not matter what companies want to do. It is what we should be telling companies to do, so that those who invest and are stakeholders in those companies can really understand what has been going on in the past 12 months.
Having made those points, I beg leave to withdraw the amendment.
“( ) particulars of any remuneration payment (within the meaning of Chapter 4A of Part 10) made or to be made to the person after ceasing to be a director, including its amount and how it was calculated,”
Viscount Younger of Leckie
My Lords, Amendments 58BH, 58BJ and 58BK relate to the information that must be published by a company when a person ceases to be a director. They seek to clarify the information that must be disclosed and ensure complete transparency. Whenever a person ceases to be a director, shareholders want to know the details of their exit package. At present they may have to wait several months before they find this out. We believe that requiring companies to publish this information as soon as possible after a director departs will help to put pressure on companies to moderate such payments. Clause 72 introduces this requirement and requires the company to publish on its website details of payments for loss of office. However, because of the complexity of directors’ pay, some payments made after loss of office will technically be classed as remuneration payments rather than loss of office payments, so, legally, companies would not have to include details of them. Such payments can represent a substantial part of an individual’s exit package and so should form part of the disclosure on a company’s website. These amendments address this gap, bringing within scope,
“particulars of any remuneration payment … made or to be made to the person after ceasing to be a director, including its amount and how it was calculated”.
This will close a loophole which could otherwise have been exploited by companies attempting to evade the spirit of the legislation by not making full disclosures on exit payments. I beg to move.
Lord Mitchell
My Lords, we welcome this amendment. It is in the spirit of giving shareholders more information. We are very happy to support it.
Viscount Younger of Leckie
I am pleased to have support for these minor and technical amendments.
“Supply of customer data
(1) The Secretary of State may by regulations require a regulated person to provide customer data—
(a) to a customer, at the customer’s request;(b) to a person who is authorised by a customer to receive the data, at the customer’s request or, if the regulations so provide, at the authorised person’s request. (2) “Regulated person” means—
(a) a person who, in the course of a business, supplies gas or electricity to any premises;(b) a person who, in the course of a business, provides a mobile phone service;(c) a person who, in the course of a business, provides financial services consisting of the provision of current account or credit card facilities; (d) any other person who, in the course of a business, supplies or provides goods or services of a description specified in the regulations.(3) “Customer data” means information which—
(a) is held in electronic form by or on behalf of the regulated person, and(b) relates to transactions between the regulated person and the customer.(4) Regulations under subsection (1) may make provision as to the form in which customer data is to be provided and when it is to be provided (and any such provision may differ depending on the form in which a request for the data is made).
(5) Regulations under subsection (1)—
(a) may authorise the making of charges by a regulated person for complying with requests for customer data, and(b) if they do so, must provide that the amount of any such charge—(i) is to be determined by the regulated person, but(ii) may not exceed the cost to that person of complying with the request.(6) Regulations under subsection (1)(b) may provide that the requirement applies only if the authorised person satisfies any conditions specified in the regulations.
(7) In deciding whether to specify a description of goods or services for the purposes of subsection (2)(d), the Secretary of State must (among other things) have regard to the following—
(a) the typical duration of the period during which transactions between suppliers or providers of the goods or services and their customers take place;(b) the typical volume and frequency of the transactions;(c) the typical significance for customers of the costs incurred by them through the transactions;(d) the effect that specifying the goods or services might have on the ability of customers to make an informed choice about which supplier or provider of the goods or services, or which particular goods or services, to use;(e) the effect that specifying the goods or services might have on competition between suppliers or providers of the goods or services.(8) The power to make regulations under this section may be exercised—
(a) so as to make provision generally, only in relation to particular descriptions of regulated persons, customers or customer data or only in relation to England, Wales, Scotland or Northern Ireland;(b) so as to make different provision for different descriptions of regulated persons, customers or customer data;(c) so as to make different provision in relation to England, Wales, Scotland and Northern Ireland;(d) so as to provide for exceptions or exemptions from any requirement imposed by the regulations, including doing so by reference to the costs to the regulated person of complying with the requirement (whether generally or in particular cases).(9) For the purposes of this section, a person (“C”) is a customer of another person (“R”) if—
(a) C has at any time, including a time before the commencement of this section, purchased (whether for the use of C or another person) goods or services supplied or provided by R or received such goods or services free of charge, and(b) the purchase or receipt occurred—(i) otherwise than in the course of a business, or(ii) in the course of a business of a description specified in the regulations. (10) In this section, “mobile phone service” means an electronic communications service which is provided wholly or mainly so as to be available to members of the public for the purpose of communicating with others, or accessing data, by mobile phone.”
Viscount Younger of Leckie
My Lords, we announced at Second Reading our intention to introduce into the Bill a new provision on Midata. There are three elements to this new provision. The first relates to the supply of customer data, the second relates to the enforcement regime for the supply of customer data and the third is supplemental and explains how regulations would be introduced. I will explain each of these in more detail, but let me first say a little about what we are seeking to achieve by these amendments.
Midata is currently a voluntary programme led by an independent chair, Professor Nigel Shadbolt. Its aim is to encourage suppliers of goods and services to provide to their customers, upon request, their personal historic transaction and/or consumption data in an electronic machine-readable format. The provision we are seeking to introduce into this Bill is a power to impose a duty on business to supply certain data upon request from a consumer. Let me be clear that business already holds this information electronically and is simply being asked to give it back to consumers.
Let me reassure the Committee that the Government remain keen to see businesses continue to engage with the voluntary programme so that quick progress can be made without the need to resort to regulation. What we want, however, is flexibility to give the Midata programme legislative backing, if it is appropriate to do so, for the benefit of consumers and business in this area of increasing economic potential for the UK.
Midata gives consumers more control and access to their personal and transaction data, and UK businesses will be able to take advantage of new opportunities as potential developments in the data market continue to emerge. There are two main benefits from Midata. First, services which analyse and make sense of consumers’ transaction data will emerge and will help people to manage their spending much more effectively, putting them in a stronger position and better able to deal with the increased cost of living.
How valuable could that be? The company, billmonitor, estimates that 74% of UK mobile users with a contract spend an average of £171 more each than they need to every year, equating to almost £6 billion per year in unnecessary costs. A better alignment between consumer need and purchasing will enhance competition and this in turn will reward firms offering the best value products in particular markets, allowing them to win more customers, make profits and better utilise resources.
Secondly, Midata will act as a platform for innovation and will help to strengthen the competitive digital economy in the UK. It will lead to the creation of new businesses which will help people to manage, interpret and interact with their consumption data in many innovative ways. So what might people do? Services such as Money Dashboard or lovemoney already provide people with an instant, true view of their finances in one place, which helps individuals aggregate information about their money from multiple different financial services providers to gain a rounded picture of their financial affairs but are hampered by constraints in accessing the data. At present, consumers cannot always receive this information through existing mechanisms, or they may struggle to find it in a format that can be easily reused.
Giving consumers the right to obtain their own transaction and consumption data in portable electronic format will make it easier for them to use tools such as those I have described. They would simply be able to plug their past transaction or consumption data in at the press of a button. Automating the provision of data will also make such services cheaper to provide while making it easier for companies to provide innovative new services which can make use of the data. In this way, Midata can help turn a niche market for sophisticated money management tools into a mass market.
Baroness Hayter of Kentish Town
My Lords, I thank the Minister for introducing this new provision. We consider that the concept behind the Midata initiative is very worthy. We note that when it was launched, the heading of the BIS press release was:
“New power to boost consumers’ access to data”.
It seemed to be a welcome initiative and we applaud the Government’s role in pushing for voluntary initiatives on giving consumers access to their own purchasing and transactional data.
We also recognise that there is a need to put some of this on a statutory basis so that all providers of goods and services can, in time, be required to provide that access. But the act of putting this on a legal basis forces us to consider, and provide for, the complications that could arise. I am sure that the Minister will be aware of the very strong objection of the British Retail Consortium to this initiative. However, he may also want to note that the consumer organisation, Consumer Focus, while admiring the supposed right, has some serious anxieties about it. We risk the fact that what should be an improved consumer service may actually have issues that have not been dealt with fully on both security and privacy. Some of these arise already, both with the way in which providers keep individual data for their own purpose and in the voluntary schemes of provision to customers that are being introduced without statutory backing.
Once those schemes are required by the Government, then surely the Government and Parliament have a duty to ensure that consumer protection is built into the process. The new service that will be required of providers by law will involve issues of personal data transmission, data storage, multiple combination and multiple access, which means that the process must have built into it security and minimisation of risk to consumers’ privacy and disclosure of identity. Such precautions will also need to be accompanied by systems of identifying liability and responsibility for redress and absolute clarity about how one goes about seeking that redress.
At the moment, data on the purchases and transactions are largely held by the direct provider, although they are also often sold on or combined with other data. Under Midata, consumers will also have access but there will be greater potential for the selling on and combining of data. Hence, liability, clarity on liability and redress systems are essential. If the system works, the Midata providers must be required to adhere to the highest security and data protection standards. Consumers need to know that Midata providers meet those high standards; so there must be easy identification of those who have been designated as trustworthy providers. It is presumably the Government’s contention that this will be done by secondary legislation, but unless the principles are written clearly in primary legislation, it will be difficult to judge whether those systems can work.
Amendment 58D deals with enforcement of the duty to disclose, but it includes no provision for complaint, mediation, arbitration or redress should that obligation be carried out in a way that endangers or threatens to endanger privacy and security of data. We know that the Information Commissioner is designated as enforcer, at least until the Government decide otherwise, but there is no provision for an ombudsman or for ADR coverage for this. On the Information Commissioner, I have great admiration for the difficult job that both he and his predecessor have done but I seek some confirmation that the Minister is confident that that role is appropriate to fall to the Information Commissioner. He does, of course, already have to make difficult judgments between transparency and data protection, but there are particular dimensions here. I am curious to know whether he even wants this job. Perhaps the Government could also give us some assurance about what additional resources will he get in order to carry it out. The Government themselves seem a bit hesitant as to whether the Information Commissioner is the best-placed person, as they have allowed scope for designating some other body. I do not know whether the Government had something else in mind, or whether it was just a fail-safe provision.
Going back to Amendment 58C, there is also the associated issue of what kind of information and what kind of access is covered. There are many ways in which we purchase goods and conduct our financial transactions. Does this cover the web-based data and transaction services—social media, free apps and online platforms that facilitate transactions between parties? Obvious examples are eBay and Amazon—all different, but all using and storing online consumer data. Because of the conglomerate nature of many retail providers across many markets, there is an issue of how this data is shared even within a company and what the legitimate and non-legitimate boundaries are of such sharing.
In the course of the Financial Services Bill, my noble friend Lord Whitty raised the issue of whether consumer data collected by Tesco, and recorded on their Clubcards, from its retail sales could be used by Tesco’s banking arm to establish creditworthiness. Some Chinese walls are already required within banks and financial institutions. The new Financial Services Act, however, does not require that, in the case of a bank owned by a non-financial institution, there must be such Chinese walls—although the Government did write into the Bill, now an Act, a reserve power to make that requirement. Tesco and financial services are simply as a potential example of this. It has not yet happened. More concretely, in America there have been issues with Walmart and its banking arm.
With consumer data now required, or potentially required, under this Midata clause, to be parcelled up neatly on an individual basis rather than aggregated or earmarked for future marketing as is more usually the case, the possibility for data sharing increases significantly. There is also the issue of companies which are major traders in this country but owned overseas, some in the four areas designated as priority by the Government for this legislation.
Could the Minister tell us how far privacy and data protection can be guaranteed beyond UK boundaries? The sectors chosen—energy, mobile phones and financial institutions—are dominated by major companies and feature oligopolistic markets. However, there are small providers, and there will be even more in other sectors to which these provisions will be extended in due course. Provisions which are not onerous for large retailers—banking and telecoms giants, for example—could be very onerous for smaller retailers and even smaller financial institutions. We understand that the legislation has no exclusions for smaller companies. Again, perhaps the Minister could confirm whether that is the case.
We would also like to ask the Government about their choice of sector priorities. The amendment links together information on individuals held by the provider and held on behalf of the consumer. At present these are legally very different. Data, such as that held by Tesco on its Clubcards, are the clear property of the providing company, as is most data on purchases. However, transactional data held with banks on savings or debt are the property of the consumer and subject to strict privacy and disclosure requirements. As we see it, under Midata, the distinction between those two is blurred.
There are also issues about the kind of data disclosable and the format of that disclosure. The intention, as the Minister outlined, is to provide in electronic machine-readable form data requested by the customer. The customer must be able to request all purchasing and transactional data for a period of at least a year in order to be able to draw rational conclusions and make rational decisions on, for example, changing the pattern of purchase or switching suppliers, which has been suggested. That needs to be specified.
Viscount Younger of Leckie
My Lords, I welcome the general support given to Midata by the noble Baroness, Lady Hayter, in her initial remarks. I listened carefully to the large number of points that she raised. She has clearly put a lot of thought into the issue and I would like to address as many of the concerns that she raised as possible. It may well be that I do not cover them all, in which case, I will write to her.
The first issue I want to address is the point that the noble Baroness, Lady Hayter, raised concerning the British Retail Consortium and the objections that they have expressed on Midata. To re-emphasise the point—the focus of the power of this Bill are the four core sectors of energy, mobile phones, current accounts and credit cards. We cannot say that there will never be circumstances where Ministers believe including supermarkets within the regulations is worthwhile. But, before they do so, they will have to take account of the factors set out in proposed subsection (7) in Amendment 58C. The relevant legislation to effect such a change would be subject to enhanced parliamentary scrutiny through the affirmative procedure.
The noble Baroness, Lady Hayter, asked whether it was true that consumer bodies had been warning about the risk of this programme for some time. It is true that the Government continue to work with consumer representative groups and business to tackle any potential risks to consumers—the point that she raised. A range of consumer bodies endorsed the principles of Midata published by the Government in 2011, such as Citizens Advice, Consumer Focus and the Office of Fair Trading. Members of these consumer organisations also sit on the Midata strategy board, which is responsible for driving the direction of the overall programme. However, the Government are taking these concerns seriously and the Department for Business, Innovation and Skills will continue to work closely with consumer groups to ensure that consumer privacy is protected.
The noble Baroness, Lady Hayter, asked whether the Information Commissioner actually wanted the role of enforcement. I can reassure her that Ministers have discussed this with him directly and he was, indeed, willing to take on the role. The noble Baroness also asked if this was an appropriate role for the Information Commissioner and whether he had enough resources to undertake this particular role. We have had detailed discussions with the ICO on how the enforcement regime could work for Midata. If regulations are brought forward in the future, we are confident that the ICO’s existing expertise in data protection will help it to effectively enforce the Midata right for consumers. In addition, we did not want to place any additional cost burden on business, but we have included provisions enabling other bodies to be designated as enforcers, if that is later decided to be more appropriate than the ICO. For example, if we were to regulate for one sector only, it might be appropriate to designate a particular sector regulator.
The noble Baroness raised the issue of data protection. Existing consumer protections would still apply under Midata. All organisations that process personal data in the UK, including for the purposes of the Midata initiative, must comply with the Data Protection Act’s eight data protection principles. The DPA is enforced by the independent Information Commissioner’s Office, which has powers of prosecution and can issue monetary penalty notices requiring organisations to pay up to £500,000 for serious breaches of the DPA.
The noble Baroness also raised the issue of exclusions for smaller companies. I mentioned earlier that she will remember the issue of micro-businesses. The power allows flexibility for smaller companies to be excluded at the regulation stage. I hope that reassures the noble Baroness on that particular point.
The noble Baroness, Lady Hayter, also raised the issue as to whether consumers would be charged. The regulations could allow for consumers to be charged if that is considered appropriate at that particular stage. The new clause already limits such charges to the cost of complying with the request for data.
There are two more questions raised by the noble Baroness. First, she asked why there has been no government lead on providing public sector data. These measures will not apply to the public sector. However, in parallel, the Government are looking at issues of public sector data. The Open Data White Paper sets out the Government’s position and plans on public sector data release.
The noble Baroness also asked what form the regulations would take. The Government want first and foremost to encourage voluntary progress on this particular Midata programme. If regulations are subsequently brought forward, they will be shaped by consultations with stakeholders first.
The Government will continue to engage with business, consumer groups, regulators and trade bodies involved in the voluntary programme to accelerate progress as well as to broaden our engagement with other sectors. In bringing forward these amendments, we are conscious that a balance needs to be struck between the rights of individuals, the costs to businesses and wider benefits to the economy. This balance also needs to reflect the digital age and the increasing amount of data that is now unavoidably available.
We believe that giving consumers the right to obtain their own transaction and consumption data in portable electronic format, thus enabling them to use tools to manage this information in a smart way, is an effective way to empower consumers in the 21st century, which is good for business and good for the economy.
Lord Whitty
It seems to me that the Minister was talking about charging by the current owner of the information, or provider—the person with whom you are dealing through your mobile phone company. But I understand that the Government envisage there being new intermediaries in this area that will obviously be looking for a profit out of it for themselves and to use that data in different ways. Would that restriction on charging apply to them? In a sense, you have doubled the administrative time with a provider and an organisation that is being subcontracted by that provider to deal with the consumer. It also complicates data protection and potential liability and redress.
Viscount Younger of Leckie
The noble Lord, Lord Whitty, makes an interesting point. I will need to double check and revert to him to clarify his point.
Baroness Hayter of Kentish Town
My Lords, I thank the Minister for his reply. I am particularly reassured by the ongoing discussions with consumer groups. Perhaps it was not clear in what he said—I did not quite hear it—but it seemed to me that he said that no extra resources would be made available to the Information Commissioner. If that is not the case, perhaps that could be clarified.
“Supply of customer data: enforcement
(1) Regulations may make provision for the enforcement of regulations under section (Supply of customer data) (“customer data regulations”) by the Information Commissioner or any other person specified in the regulations (and, in this section, “enforcer” means a person on whom functions of enforcement are conferred by the regulations).
(2) The provision that may be made under subsection (1) includes provision—
(a) for applications for orders requiring compliance with the customer data regulations to be made by an enforcer to a court or tribunal;(b) for notices requiring compliance with the customer data regulations to be issued by an enforcer and for the enforcement of such notices (including provision for their enforcement as if they were orders of a court or tribunal).(3) The provision that may be made under subsection (1) also includes provision—
(a) as to the powers of an enforcer for the purposes of investigating whether there has been, or is likely to be, a breach of the customer data regulations or of orders or notices of a kind mentioned in subsection (2)(a) or (b) (which may include powers to require the provision of information and powers of entry, search, inspection and seizure);(b) for the enforcement of requirements imposed by an enforcer in the exercise of such powers (which may include provision comparable to any provision that is, or could be, included in the regulations for the purposes of enforcing the customer data regulations).(4) Regulations under subsection (1) may—
(a) require an enforcer (if not the Information Commissioner) to inform the Information Commissioner if the enforcer intends to exercise functions under the regulations in a particular case;(b) provide for functions under the regulations to be exercisable by more than one enforcer (whether concurrently or jointly);(c) where such functions are exercisable concurrently by more than one enforcer—(i) designate one of the enforcers as the lead enforcer;(ii) require the other enforcers to consult the lead enforcer before exercising the functions in a particular case;(iii) authorise the lead enforcer to give directions as to which of the enforcers is to exercise the functions in a particular case.(5) Regulations may make provision for applications for orders requiring compliance with the customer data regulations to be made to a court or tribunal by a customer who has made a request under those regulations or in respect of whom such a request has been made.
(6) Subsection (8)(a) to (c) of section (Supply of customer data) applies for the purposes of this section as it applies for the purposes of that section.
(7) The Secretary of State may make payments out of money provided by Parliament to an enforcer.
(8) In this section, “customer” and “regulated person” have the same meaning as in section (Supply of customer data).”
“Supply of customer data: supplemental
(1) The power to make regulations under section (Supply of customer data) or (Supply of customer data: enforcement) includes—
(a) power to make incidental, supplementary, consequential, transitional or saving provision;(b) power to provide for a person to exercise a discretion in a matter.(2) Regulations under either of those sections must be made by statutory instrument.
(3) A statutory instrument containing regulations which consist of or include provision made by virtue of section (Supply of customer data)(2)(d) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.
(4) A statutory instrument containing any other regulations under section (Supply of customer data) or section (Supply of customer data: enforcement) is subject to annulment in pursuance of a resolution of either House of Parliament.”
Lord Razzall
“Fiduciaries: performance of investment functions
(1) In the performance of any investment functions, a fiduciary must act in the way the fiduciary considers, in good faith, would be most likely to be for the benefit of the beneficiaries as a whole and to be fair as between the beneficiaries, including as between present and future beneficiaries and in doing so, the fiduciary may have regard (amongst other matters) to—
(a) the likely consequences of any investment activities in the long term,(b) the impact of any investment activities on the financial system and the economy,(c) social and environmental considerations, including—(i) the implications of social and environmental factors for return on investments, and(ii) the impact of any investment activities on communities and the environment,(d) the implications of any investment activities for beneficiaries’ quality of life, and(e) the views, including the ethical views, of beneficiaries.(2) If a fiduciary considers that the general adoption by market participants of a particular standard of conduct has been or would be conducive to the benefit of the beneficiaries, the fiduciary may observe and promote the standard notwithstanding any rule of common law or equity which might otherwise oblige the fiduciary to act contrary to the standard or to require or influence any other person to do so.
(3) In this section—
“beneficiaries” means persons for whose benefit investments are being, will be or may be applied, whatever the particular form of ownership under which investments are held for the time being;
“benefit” includes—
(a) financial benefit provided out of investments; and(b) any benefit which the fiduciary considers can be conferred on beneficiaries without any material prejudice to long-term return on investments; “fiduciary” means a person or institution to which this section applies;
“investment activities” means any actions taken in the performance of any investment functions;
“investment functions” includes (amongst other matters) such of the following as pertain to the particular description of fiduciary—
(a) the selection, retention and realisation of investments,(b) the exercise of rights, including voting rights, attaching to investments,(c) engagement with the managers of investee companies and other investee entities, including in relation to corporate governance and corporate actions,(d) the selection, appointment and monitoring of investment managers and other agents to whom the fiduciary delegates any investment functions,(e) the selection and ongoing review of any investment funds which are operated by institutions acting as principals and in which the fiduciary invests,(f) the selection, appointment and monitoring of investment consultants and of other advisers in relation to the performance of any investment functions,(g) advising or assisting another fiduciary in relation to the performance of any investment functions,(h) taking such steps as the fiduciary considers reasonable to ascertain the views of beneficiaries in relation to the fiduciary’s investment activities, and(i) collective action with other market participants to further any common interests;“investments” means the investments in relation to which any investment functions are performed and, where the context admits, includes assets of any kind representing such investments;
“standard of conduct” includes (without limitation) a standard which a fiduciary considers to be in accordance with—
(a) widely accepted norms of behaviour relating to environmental, social or governance issues, including any such norms set out in international conventions, voluntary codes of practice or otherwise, or(b) the views or values of beneficiaries.”
Lord Razzall
My Lords, this is a new point. Although the amendment which stands in my name and that of my noble friend Lady Brinton, on which I am grateful for the assistance of FairPensions, is complicated, the issue is really quite straightforward. It is that there has been significant concern in the financial markets for a number of years that organisations that are described as fiduciaries in the drafting of this amendment, which include trustees, pension funds et cetera, are, as a matter of law, obliged when making an investment to take into account only the financial advantage of their pensioners, beneficiaries and clients.
The purpose of the amendment is to establish clearly a matter of law that has always been in doubt, on whether, in making an investment decision, such as whether to accept a bid for a company in which they are invested or any decision regarding the investment money for which they are responsible, fiduciaries are entitled to take into account the wider considerations set out in subsection (1) of new Clause 58F without potentially being attacked for not looking after the interests of the people whose money they are managing. This is a serious issue because the law is unclear on whether they are entitled to do so, and the purpose of these amendments is to make clear that in those situations the fiduciaries, as they are defined, may take into account other factors.
One of the objections to these proposed amendments is that they are mandatory. They are not mandatory; there is nothing here to say that a trustee cannot simply take the money and run. The purpose is to clarify that if trustees take into account the wider interests as set out in subsection (1) of the proposed new clause in Amendment 58F, they cannot be criticised as a matter of law. That is the purpose of this amendment and FairPensions has been campaigning for it for some time. We thought this was a Bill where we could try to get it inserted. I beg to move.
Baroness Hayter of Kentish Town
My Lords, we very much welcome the amendments tabled by the noble Lord, Lord Razzall, and the noble Baroness, particularly their intention to clarify investors’ fiduciary duty. The amendments, as have been suggested, would clarify that institutional investors are not legally obliged to maximise short-term profits at any cost but “may”—that word was emphasised—take into account wider factors, such as the long-term sustainability of returns. This is modelled on Section 172 of the Companies Act 2006, which similarly clarified that company directors may take account of longer-term and wider factors, such as their impact on communities or the environment.
We on this side tabled remarkably similar amendments to the Financial Services Bill last year. We remain of the view that the position of those who hold money or assets on behalf of others, and who take decisions about those assets, should have their real owners’ or beneficiaries’ interests centre stage. The Kay Review of UK Equity Markets of July 2012 acknowledged a problem with misinterpretations of fiduciary duties, based on what he said was,
“a narrow interpretation of the interests of … beneficiaries which focused on maximising financial returns over a short timescale and prevented the consideration of longer term factors which might impact on company performance, including questions of sustainability or … social impact”.
This can lead to unhelpful short-term behaviour by investors and is a barrier to the adoption of the stewardship approach. The Kay report concluded that,
“there is a need to clarify how these duties should be applied in the context of investment, given the widespread concerns about how these standards are interpreted”.
The Bill in front of us is about enterprise and long-term growth. The Government are giving shareholders additional rights, which we welcome, but these must be balanced with duties to the underlying beneficiaries, who may have wider interests than just immediate returns. These amendments propose that there should be no legal barriers to consideration of those beneficiaries’ interests. They do not mandate anything but they clarify the law. The amendments are, we would say, permissive rather than prescriptive, and would ensure that the law does not prevent trustees from taking a broader approach. The provision does not mandate them to do so; in fact, it restores the primacy of trustees’ discretion in deciding how best to serve their beneficiaries, as opposed to assuming that the law restricts them to taking a particular approach.
The amendments make it clear that the duty of fiduciary investors is solely to their beneficiaries, and that the interests of beneficiaries must be the basis for all decisions. They clarify that this need not always mean maximising short-term profits: if trustees believe that their beneficiaries’ interests will be better served by taking into account wider factors, they will be empowered to do so. Indeed, where trustees choose to take account of purely non-financial factors—such as beneficiaries’ ethical views or implications for their quality of life—the amendments specify that this must not be to the detriment of beneficiaries’ long-term financial interests.
Perhaps I may give one example to show why this amendment is so needed. A large pension fund, which I fear does not wish to be named in this debate, received legal advice to the effect that its policy on shareholder engagement and responsible investment might be unlawful. Its policy stated that the fund would seek to exercise voting rights in listed companies in which it held shares, and that it would take into account environmental, social and governance issues with the potential to affect the long-term value for the fund’s beneficiaries. This position is firmly grounded in the financial interests of beneficiaries, and is widely accepted as best practice within the industry. The Government endorsed such an approach by promoting the stewardship code, through its package of enhanced shareholder rights on executive pay, and, in the Commons, where Pensions Minister Steve Webb said that,
“the coalition Government fully support the highest standards of corporate governance and ethical behaviour. We agree that a socially responsible investment strategy is a sound choice for pension schemes”.—[Official Report, Commons, 20/1/12; col. 1044.]
Despite this, the advice from a large and reputable law firm took an extremely narrow view of beneficiaries’ best interests, and suggested that the costs involved in exercising voting rights might render the policy unlawful unless the firm could demonstrate that such stewardship brought monetised benefits to the individual fund. The opinion cast doubt on whether such benefits could be demonstrated. This illustrates why the Government’s approach to responsible capitalism, which has focused on giving shareholders more rights, needs to be complemented by measures to remove any perceived legal barriers to the responsible exercise of these rights.
For long-term, sustainable growth and returns, we want responsible shareholder engagement with listed companies. The Kay review recommended, and the Government agreed, that the Law Commission be asked to review the question of fiduciary duty, with Kay himself indicating that statutory clarification may be necessary to resolve this. We would therefore ask Minister to confirm today that, if the Law Commission thereby recommends such statutory underpinning, the Government will take action.
Viscount Younger of Leckie
My Lords, these amendments would introduce a statutory requirement for institutional investors to act in the best interests of their clients and beneficiaries. They seek to clarify that these investors are not legally obliged to maximise short-term financial returns, but may take into account longer-term considerations, including the social and environmental impact of the companies in which they invest.
I am grateful to my noble friend Lord Razzall, supported in name by my noble friend Lady Brinton, for giving us the opportunity to debate the vital issue of fiduciary standards in the investment industry. As noble Lords may be aware, the duties of investment intermediaries were considered by Professor John Kay in his 2012 independent review of equity markets and long-term decision-making. The noble Baroness, Lady Hayter, mentioned this in her speech. The Government have broadly accepted the recommendations of the Kay report in this area. Specifically, they have made clear their support for the view expressed by Professor Kay, and echoed in Amendment 58F, that institutional investors should not automatically assume that maximising short-term returns is sufficient to serve the interests of their clients or beneficiaries. Instead they should take into account long-term factors relevant to their clients’ interests over the time horizon of the investment. However, the Kay report also found that there was no clear agreement on what the law currently requires of those investing on others’ behalf, and recommended that the matter be referred to the Law Commission.
The Government have therefore asked the Law Commission to undertake a review of the legal obligations arising from fiduciary duties that dictate what considerations are appropriate for trustees and other intermediaries acting in the best interests of their clients and beneficiaries. The Government also support Professor Kay’s view that there should be a common minimum standard of behaviour required of all investment intermediaries. While I therefore have great sympathy with the spirit of my noble friends’ intentions, I do not believe that the approach taken in these amendments would achieve this. The amendments attempt to enshrine aspects of the common-law concept of fiduciary duties in statute, and to apply these to certain institutional investors in all circumstances. This includes applying them to certain FSA-authorised firms without due regard to the FSA’s existing regulatory requirements. This approach would add to confusion and uncertainty about the meaning of the word “fiduciary”, the circumstances in which a fiduciary relationship already arises and the standards already expected of investors in regulation.
The government response to the Kay report is very clear in setting out the principle that all investment intermediaries should act in the best interests of their clients or beneficiaries in line with generally prevailing standards of decent behaviour. In order to embed this principle effectively, the Government have asked the FSA, and its successor organisation, the FCA, to consider to what extent current regulatory rules in this area align with this principle and to determine what action might be desirable. This includes, if necessary, changes to regulatory requirements at EU level.
With these reassurances, I hope that my noble friends will feel able to withdraw their amendment.
Lord Razzall
My Lords, I must say I am slightly disappointed by the Government’s response to this. This amendment is not about looking at the issues that the noble Viscount has suggested need to be looked at. It has nothing to do with the FSA or European regulations. Its entire purpose is to clarify the existing law. For example, it seeks to clarify that institutional shareholders which had a shareholding in Cadbury’s were entitled to take the view that they did not have to accept a very successful financial bid if they were concerned about other characteristics. That is not an FSA point or a European regulation point; it is a simple matter of clarifying the law. That is all we are asking for.
I have serious reservations and concerns about the matter being referred to the Law Commission because I predict that we will be debating this in five or 10 years’ time—those of us who are still alive then—when the Law Commission eventually comes back with a recommendation that will cover much wider areas than are dealt with by the amendment, as the Minister has indicated. To my mind, that is typical of the way in which Governments respond to things, in that you propose a relatively small amendment and they say, quite fairly, that the whole area, which is huge, is being looked at, of which the amendment is just a small part, and therefore they cannot do anything about the small amendment until that huge area has been looked at. That is the problem, and that is what I worry about. However, in the mean time, I shall withdraw the amendment.
Viscount Younger of Leckie
I would like to clarify this matter or go some way to clarifying it. I re-emphasise that the Government are currently discussing the precise terms of reference for the review with the Law Commission and, as mentioned earlier, will make an announcement in the coming weeks. The objective of the review is to provide clarity for institutional investors on their legal obligations. It would not be appropriate to prejudge the Law Commission’s review on whether there is a need for legislation to achieve that end. I hope that goes a little way to clarify our position, but an announcement will be made in the coming weeks.
Lord Razzall
If I may say so, that very short response was more helpful than the Minister’s previous comments. I beg leave to withdraw the amendment.
“(6) The regulations may provide for an employment tribunal to have power, where a person fails to comply with an order to carry out an equal pay audit, to order that person to pay a penalty to the Secretary of State of not more than an amount specified in the regulations.
(6A) The regulations may provide for that power—
(a) to be exercisable in prescribed circumstances; (b) to be exercisable more than once, if the failure to comply continues.(6B) The first regulations made by virtue of subsection (6) must not specify an amount of more than £5,000.
(6C) Sums received by the Secretary of State under the regulations must be paid into the Consolidated Fund.”
Baroness Stowell of Beeston
In moving Amendment 58GA, I will speak also to Amendments 58GB and 58GC, which together clarify three elements of Clause 74.
Clause 74 inserts a new Section 139A into the Equality Act 2010. This will enable Ministers to make regulations that will require employment tribunals to order employers to undertake an equal pay audit where they have been found to have broken sex discrimination law relating to pay. Each of these amendments responds to the three recommendations made by the Delegated Powers and Regulatory Reform Committee in its 10th report published on 14 December 2012.
The first recommendation drew the attention of the House to the lack of clarity in subsection (6) about the intended means of enforcement of equal pay audit orders. The second recommendation asked the Government to address the scope of the duty in subsection (7), which provides an exemption for micro and start-up businesses in the first regulations made under this power. In practice, this means that they will not have to undertake equal pay audits in the event that they are found by an employment tribunal to have breached equal pay laws.
The third recommendation of the committee concerned the lack of an expressed requirement for the Minister bringing forward regulations to make them in concurrence, or in consultation, with the Minister with responsibility for employment tribunals at the time.
The Government are very grateful to the Delegated Powers and Regulatory Reform Committee for its recommendations. We have considered them carefully and accept them; I hope that in the amendments I am moving today, we are able to address all the points that they raised. I will take them in turn.
Amendment 58GA outlines the enforcement regime referred to in subsection (6). It explains that the regulations will give an employment tribunal the power to ask an employer who fails to comply with its order to undertake an equal pay audit to pay a civil penalty that initially must not exceed £5,000. This civil penalty can be repeated if the employer’s noncompliance continues. All fines collected by the Secretary of State from noncompliant employers must be paid into the Consolidated Fund.
Amendment 58GB replaces the reference to micro-businesses and start-up businesses in subsection (7) with a definition of the businesses to which the first regulations on equal pay audits must not apply. New subsections (7) and (8) outline what we mean by a micro-business and a start-up business. A micro-business must have fewer than 10 employees immediately before a period that will be set out in regulations. A start-up business, on the other hand, is a business that began during a period that will also be specified in regulations. This amendment also removes the phrase,
“unless further provision is made under this section”.
at the end of subsection (7), which the committee had criticised as lacking clarity.
Amendment 58GC inserts a requirement for the Minister of the Crown responsible for making regulations under the power in new Section 139A to first consult the,
“Minister of the Crown with responsibility for employment tribunals”.
This will ensure that any interdepartmental consultations do not exclude whichever government department has responsibility for employment tribunals whenever secondary legislation is made under this power.
We have found all the recommendations from the Delegated Powers and Regulatory Reform Committee helpful. We are grateful to it and are happy to propose and recommend the clarifying amendments we have made to this clause, which give effect to each of them. I beg to move.
Baroness Thornton
My Lords, I thank the Minister for that very clear explanation of these amendments; we welcome them. There is a general consensus that these amendments are welcome, but the Minister will not be surprised to hear that we believe that the substantive issues needed to go further. I have a few questions to ask the Minister about the substantive issue of these subsections.
As the Minister will be aware, the EHRC advocates that time limits be imposed; the TUC contends, because of the difficulties that employees are likely to face in accessing pay information, that all employers should be required to carry out these orders, not just those taken to a tribunal. As my honourable friend Kate Green MP said on Report in the Commons,
“While the Government have made one or two grudging steps forward in relation to improving equalities, the proposal on equal pay audits is a watering down of our commitment to have such audits across the board for larger businesses, not only when they have been unsuccessful at tribunal”.—[Official Report, Commons, 16/10/2012; col. 252.]
The reason why that is necessary is that recent evidence shows, as the Minister will be aware that gender pay gap continues to persist. The 2012 annual survey of hours and earnings found that the mean pay gap between men and women’s average hourly earnings, excluding overtime, was 14.9% for full-time workers and 7.9% for part-time workers. The Equality and Human Rights Commission’s 2010 triennial view found that pay gaps also affect disabled people and some ethnic groups, and I am going to return to that in a moment. In its response to the modern workplace consultation carried out by the Government, the EHRC noted that the power to impose pay audits needs to be as robust as possible in order to have maximum effect.
It seems to us that the tests for this legislation are, first: will it help employers? Carrying out an equal pay audit should be viewed as a positive means of enabling the employer concerned to eliminate pay inequality and minimise the likelihood of facing future equal pay tribunal court claims, rather than as a penalty. Secondly, will it avoid the possibility that, if equal pay audits are seen as a penalty, there is a risk that employers will settle equal pay cases outside court to avoid that penalty? This could be particularly true of those firms that can afford to settle and are anxious to avoid negative publicity.
Does the Minister acknowledge that conducting an equal pay audit will not in itself eliminate a gender pay gap? It will, however, bring to light and enable employers to address any equal pay issues that are uncovered. Employers will still need to draft an action plan to rectify any unjustifiable pay gaps they find, implement changes and regularly monitor the outcomes. It seems to us that implementing and monitoring the necessary changes are the most important aspect of any equal pay audit. Employers will need to be made aware that there will be an expectation on them to do this. Will the Minister assure the Committee that this is indeed the case? Employers will also need to be made aware of the time limits that will be placed on them to conduct and action their equal pay audits and of what sanctions will be taken if they are breached.
Finally, what are the Minister’s views on progress on pay gaps for other strands of discrimination; for example, religion or belief, age, race, disability, and sexual orientation? Do the Government intend to do any research or take any action on those matters too, and if so, when?
I welcome this part of the Bill and the amendments which will improve it significantly, but I do not believe that any of us can rest on our laurels on this matter. I am sure the Minister will agree.
Baroness Stowell of Beeston
My Lords, I am grateful to the noble Baroness for her support of our amendments. The Government very much believe in and are strongly committed to equal pay and the important laws that already exist. If there were enough time, and perhaps on another occasion, I might recount some of the stories that my mother used to tell me about when she first arrived in Nottingham as a teenager and was working in big factories and was very miffed to find that the men were paid a lot more than she was paid for doing the same job.
Businesses should be encouraged to make progress on complying with these important laws. Where it is not necessary, we should avoid a statutory approach in terms of making them comply. I recognise the point that the noble Baroness was making about progress in this area. There has been progress, but clearly more needs to be done. That is why this Government have introduced some measures to increase transparency on how pay is reflected in organisations. There seems to be quite a positive response to those voluntary measures.
We think that equal pay is so important, so we also believe that it is right to introduce these mandatory equal pay audits for businesses that have failed to comply with the law. When the law has been broken, they need to be forced to address that. That is why we believe that this is the right approach to take.
The noble Baroness raised some questions for me to respond to. She asked why equal pay audits are not available as an automatic right. We believe that carrying out a systematic pay audit of staff can be burdensome, and we do not want to place unnecessary burdens on employers who have done nothing wrong. We also feel that some employers are already carrying out these equal pay audits on a periodic basis and are using them in a constructive and good way. We do not want them to feel that they are being unnecessarily penalised when they are already doing the right thing.
The noble Baroness asked whether we thought that, once this measure is in force, the equal pay audits will simply push employers to settle equal pay claims. Our view on that is that if any employer were facing a continuing claim against it on equal pay grounds, it would soon find that it would not be cost effective to keep settling those claims. I do not accept that that would be a consequence of this.
The noble Baroness asked why the equal pay audit would not cover other protected characteristics. As she and I have acknowledged, equal pay legislation for men and women has been in place for some 40 years. We think it is right to focus the audit on sex-based pay differentials alone as only there is there a specific right to equal pay, and the appropriate route of redress for discrimination due to any protected characteristic other than sex in matters relating to pay, is through the discrimination provisions in the Equality Act.
The noble Baroness also asked how the timeframe for carrying out an audit would be decided. New Section 139A of the Equality Act allows employment tribunals to be given discretion in,
“deciding whether its order has been complied with”.
I think those are all the questions that the noble Baroness—
Baroness Thornton
Perhaps the noble Baroness could write to me about what the time limits are, as that is quite important. I do not want to delay the Grand Committee on that matter, so I will accept an answer in handwriting.
Baroness Stowell of Beeston
I will follow that up in writing. It is worth making the point that there will be a second consultation on the detail of how equal pay audits are carried out. It is possible that that might be reflected in it, but I do not know for sure, so I will not try to guess any more on that matter. I shall confirm this in writing to the noble Baroness. I hope that I have covered all the points that she has raised with me today.
“(7) The first regulations under this section must specify an exemption period during which the requirement to order an equal pay audit does not apply in the case of a business that—
(a) had fewer than 10 employees immediately before a specified time, or(b) was begun as a new business in a specified period.(8) For the purposes of subsection (7)—
(a) “specified” means specified in the regulations, and(b) the number of employees a business had or the time when a business was begun as a new business is to be determined in accordance with the regulations.”
“( ) Before making regulations under this section, a Minister of the Crown must consult any other Minister of the Crown with responsibility for employment tribunals.”
“Relationship between an insolvent company and its suppliers
(1) Section 233 of the Insolvency Act 1986 (supplies of gas, water, electricity, etc) is amended as follows.
(2) In subsection (3)(a) at the end insert “or other supplier”.
(3) In subsection (3)(b) at the end insert “or other supplier”.
(4) In subsection (3)(d) at the end insert “or other supplier”.
(5) After subsection (3)(d) insert—
“(e) a supply of computer hardware or software or infrastructure permitting electronic communications.”(6) After subsection (3) insert—
“(3A) Any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) is void.””
Lord Stevenson of Balmacara
My Lords, one of the key aims of the Enterprise and Regulatory Reform Bill is to encourage long-term growth. Key to this is promoting the rescue of potentially viable companies that are facing short-term financial difficulties.
Suppliers are a company’s lifeblood. Companies cannot continue to operate without them yet, under existing legislation, suppliers can currently take a number of unreasonable actions when they hear a business is in trouble. Struggling companies can often be faced with extortionate payments, being moved onto more expensive tariffs or with certain key suppliers withdrawing their services altogether. This behaviour frequently leads to the unnecessary liquidation of potentially viable businesses, which is bad news not only for creditors but also for jobs and the economy. The company R3 has estimated that a change in the law could result in approximately 2,300 additional business rescues a year and increased returns to creditors.
It is true that Section 233 of the Insolvency Act 1986 currently prohibits utilities suppliers from withdrawing supply but it does not stop any other supplier, no matter how crucial, withdrawing supply or imposing a higher tariff or payment before agreeing to continue to supply. It also fails to prevent any supplier from raising its tariff once a business enters insolvency. These actions can prevent any chance of business rescue, damn the business to closure, and reduce dividends for creditors. We suggest that this legislation should be updated in the following ways to help rescue more businesses and save jobs.
Certain suppliers often use the advent of insolvency to extract “ransom payments” before they continue to supply the company. Furthermore, while utilities suppliers listed under Section 233 cannot withhold supply, there is nothing to prevent them moving an insolvent company onto a much higher tariff. We suggest that Section 233 should include a provision to prevent the exercise of contractual termination provisions on the grounds of insolvency alone, and should prevent suppliers of essential services from using their position to extract so-called ransom payments as a condition for continued supply, provided that the company continued to pay under existing contractual terms.
While original sellers of utilities services are prevented by the Insolvency Act from terminating their contracts on insolvency, on-sellers of telecoms services and equipment are not covered by the legislation, even though they are every bit as important to the business community—increasingly, these days. In addition, other services, such as IT and software suppliers, which are vital to business survival in the 21st century, are freely able to stop supplying a company on the ground of insolvency. Section 233 sets out the suppliers to which these provisions apply—currently, gas, electricity, water and communications. We suggest including in this list certain additional suppliers deemed essential for the continued operation of the business, particularly IT suppliers and on-sellers of utilities that are not covered by the original definition. A precedent for this change was set by Regulation 14 of the Investment Bank Special Administration Regulations 2011, which prevents suppliers of essential services such as financial data, computer hardware and data processing from withholding supply in the event of administration.
Finally, it is important to note that these changes expose suppliers to minimal risk, because they are paid as a priority, ahead of all other creditors during the insolvency. This is not about special treatment for insolvent businesses, but about preventing suppliers taking advantage of an insolvency and leapfrogging other creditors, at the expense of the business’s survival.
I turn to Amendment 58HZA in the group. The Finance Act 2009 established a duty on HMRC to produce a report each year on its adherence to its charter, which sets out the rights and obligations of taxpayers. Our amendment asks for HMRC’s annual report to consider a particular issue, consumer debt, and to relate that to the objectives in its annual business plan. One of the recurrent themes raised during the debates we held recently in your Lordships’ House on the Financial Services Bill was the need for the new regulatory structures to have the consumer at the centre of their thinking and practice. We have had not dissimilar debates on earlier sections of this Bill in relation to the new Competition and Markets Authority, to which we will return on Report.
This amendment is in the same vein, although the target is the HMRC, and is relatively uncontroversial and not particularly burdensome because it simply requests the HMRC to report additionally about what it is finding about levels of personal debt in the UK. This will be useful data for all those interested in this area, and might over time help to sensitise HMRC to what impact it is having on those struggling with unmanageable personal debts. I declare my interest as chair of StepChange, the leading debt charity. Its figures show that its median client owes more than £20,000 to five different creditors, with the bulk in credit cards and personal loans, and other consumer credit products. They also include mortgage arrears, rent arrears and, increasingly, fuel and utility debts, income tax and council tax. Nearly half the people who StepChange help report that unemployment or a reduced income was the main reason for their debt problems. However, people also say that life events such as illness and separation can quickly overwhelm family finances and cause or contribute to mounting debts. What StepChange finds, in fact, is that debt is rarely a problem in isolation—there are nearly always other factors that need to be addressed, including a particular concern of ours, which is the link between problem debt and depression. Nearly a half of StepChange’s clients say they had been worrying about their debts for a year or more before seeking help from a debt service provider. Around a third told the charity that their debt problems had weakened their relationships or led to a break-up. Nearly half said that debt had shattered their self-confidence to support themselves and their family.
Things changed in the personal debt world in about 2006-07, but the pre-crash boom in consumer credit also remains a key part of the UK debt narrative. Even after several years of near-zero lending, the total of outstanding secured and unsecured debt is still some 91% higher than it was 10 years ago. It is a pretty bad picture. Recent research by the Financial Inclusion Centre concluded that some 6.2 million households are currently either already in financial difficulties or at risk of getting there. And it is going to get worse. The IFS estimates that real median household incomes will fall by 7.1% between 2009-10 and 2013-14 as a result of low growth and fiscal tightening—the largest decline since the 1974 to 1977 fall of 7.5%. Recent research published by the Joseph Rowntree Foundation predicts an increase in both relative and absolute poverty between 2009 and 2020. Unemployment remains at a stubbornly high 8.3%, or 2.65 million people, and more than one in five young workers are without a job. That is particularly worrying as we know that time spent not in employment, education or training as a young adult can have a scarring effect as well as reducing lifetime earnings.
At the same time, we are experiencing an extended period where households are facing rising costs for essential goods and services. Food, fuel and transport costs are rising sharply, and we will sooner or later face a rise in interest rates, which are unnaturally low at present. Figures from the Financial Inclusion Centre show that, if living costs rise by more than £50 per week, it would double the percentage of households, currently 30%, who have no spare cash at the end of the month. That is the rather grim background to our amendment. I apologise for taking the Committee’s time, but it is important to get the context so that we can focus more closely on the amendment.
We need to know more about personal debt—how it arises, and how people cope with it. HMRC is a major player in this area, and it is important that it participates in the research that is needed and contributes to finding solutions to the problems that currently exist. Reporting on the situation that it finds each year would be a great step forward. I beg to move.
Lord Razzall
My Lords, I have considerable sympathy with the amendment proposed by the noble Lord, Lord Stevenson, and the noble Baroness, Lady Hayter. These issues are always extremely tricky in that it is a matter of getting the balance right between the wish of companies or individuals to carry on trading following an insolvency action and that of creditors to protect their interests. There is a slightly wider issue of pre-pack administrations and sale of businesses where the major losers are the unsecured creditors. That is something that your Lordships have looked at from time to time to see whether any change needs to take place. This is a relatively small amendment to marginally shift the balance in relation to organisations which, although insolvent in one form or another, are carrying on trading. We have had a lot of evidence—obviously on the Labour side as well as on our side—that there are quite significant occasions when the suppliers of these services, rather than cutting off the service, say that they will carry on the service but charge a significant extra amount. That seems not to be conducive and, in this case, shifts the balance far too far away from the creditors’ interests. Therefore, I think that this amendment is very appropriate and the Government should consider it seriously.
Lord Mitchell
My Lords, I had not intended to talk about what I am talking about now, but it is pertinent, particularly as the noble Lord, Lord Razzall, mentioned pre-pack administration. I would like to say a little more about that.
Some pretty awful stuff is going on out there. Pre-pack administration is a situation in which a company is in trouble, particularly with its creditors, and is just about hanging on, when at the very same time some influential shareholders get together with a friendly administrator and say that they will put the company into administration. They suggest that the moment that it is put into administration there will be just a short period of time in which to sell it, then they will come in with company mark 2, which will buy the assets and business from the administrator and start up again, often with a very similar name. The effect of doing that is that the small creditors, which is the area that I care about because they are generally SMEs, and the small shareholders, get absolutely stuffed, because the company ceases to exist—and it then in its revised form continues with a different name and some of the same shareholders. They have an agreement with their banker. They have dumped all the toxic stuff into the river and moved on and started the company again. This does goes on; I have seen lots of examples of it happening. In fact, I am a minority shareholder in a company and there was a time when the majority shareholder was threatening to put the company into pre-pack, which would have meant me losing my shareholding. This was several years ago but I have experienced the threat of it. In effect, it never happened but it is one of the weapons that a company can use to dump shareholders and creditors. I put this down as something that I might come back to. I am not expecting the Minister necessarily to come back on any key points but I just want to make that point.
Viscount Younger of Leckie
My Lords, this amendment seeks to amend the Insolvency Act 1986 to prevent suppliers withdrawing their services from a company after it enters formal insolvency. The amendment also seeks to address concerns about whether all utility providers are bound by an existing provision to prevent them demanding so-called ransom payments as a condition of continuing supply, which is an issue that the noble Lord, Lord Stevenson, highlighted in his speech. In addition, it seeks to extend that provision to IT suppliers.
The Government recognise the concerns that have been raised here and are looking very closely at these issues. My noble friend Lord Razzall recognised the difficulty in creating a balance here. We are committed to exploring any option which might help to rescue viable businesses and jobs, or which would improve the outcome for creditors of insolvent companies. The UK’s insolvency regime is very well regarded internationally. The regime continues to rank highly in World Bank reports for its ability to deliver quick and effective business rescue mechanisms. We want to maintain that standing and, indeed, build upon it.
However, I am sure noble Lords will recognise that this is a complex issue and that proper consideration must be given to the consequences that might result from such a change. For example, forcing suppliers to continue to supply an insolvent business might interfere with commercial behaviours and contractual rights. Freedom of contract is an important tenet in English law. Restricting a supplier’s right to terminate might also lead to knock-on insolvencies and could affect the pricing of contracts. While we recognise the advantages that such an amendment might bring, in the light of the important issues it raises, the Government wish to understand more clearly the consequences before deciding whether, and if so how, to change the law. In that way, we can satisfy ourselves that the right balance is being struck between the competing interests. I thank noble Lords for tabling this amendment and I assure them that the Government will consider this important issue very carefully.
Turning to Amendment 58HZA, this proposed new clause would require the annual report on HMRC’s charter to include a review of how its standards and values interacted with HMRC’s strategic objectives for the relevant year. It would also require the report to be made with the aim of taking a long-term view when considering proposals from individuals to repay their debts. The charter sets out HMRC’s role and the standards of behaviour and values to which the department aspires when dealing with everyone. The charter contains nine rights and three obligations. Examples include: the right to help and support; honest and even-handed treatment; professional behaviour; and acting with integrity. HMRC has six strategic objectives. These include improving the customer experience and maximising revenue to close the tax gap. The standards and values set out in the charter cover all aspects of HMRC’s work to meet these objectives, as well as its interactions with individuals and businesses.
At this point, I want to acknowledge the reference made in the speech of the noble Lord, Lord Stevenson, to StepChange. He produced some statistics and used the word “grim”. They are indeed grim figures, which I listened to extremely carefully. Whether HMRC should report on levels of personal debt was a question that the noble Lord raised. We very much recognise the issues that he raised about vulnerable customers and consumers, and the level of personal debt that he highlighted so eloquently. The Government very much recognise the need to look at these issues and we are doing so, which I should stress goes beyond HMRC’s remit.
Lord Stevenson of Balmacara
My Lords, I thank the noble Lords, Lord Razzall and Lord Mitchell, for participating in this debate. We have ranged a little further than the original terms but it was useful to have that exchange on pre-packs. I think that the main focus of the comments from the noble Lord, Lord Mitchell, was more on the interests of shareholders than creditors but it still comes back to the same point in the end. There is a bit of an issue here and I am glad to hear that it is being discussed.
I shall deal with these two amendments in reverse order. As regards the points in the second amendment about the role of the Inland Revenue, I heard what the Minister said. However, I think that the problem is exactly as he stated it but in reverse. If your primary concern—it is not a wrong concern—is that the purpose of the Inland Revenue is to maximise revenue to ensure that government services and so on may be maintained, you may have to regard vulnerable consumers and others who have difficulties as a slightly lower priority. It is true that there are nine rights and three obligations in the wonderful Inland Revenue charter but none of them mentions either of those issues in any great detail.
It is more a question of tone and approach. It is true that we have done less badly in this recession than in many other recessions, largely because the banks and other private institutions have been extraordinarily generous in terms of forbearance. That was achieved in dialogue with the Government of the day and has been continued by the current Government. However, without that there would have been a huge hole in the public fabric and services which it would have been impossible to tolerate. There are ways in which we can reach out to the vulnerable consumers that we are talking about; we have those at the heart of my charity. What I was trying to get across in the amendment was that perhaps we could have a broader discussion involving Treasury Ministers to take account of some of these issues.
This is not the time for this but, as regards much of the insolvency and the other areas with which we are dealing; it seems we are gradually finding 20th-century solutions to 19th and 18th-century problems. The idea, which I think I have mentioned in other places, that somehow there is an unimpeachable line of integrity between the creditor and the debtor is at variance with the reality of what happens when vulnerable consumers get themselves into difficulty. It is time for us to have a mature discussion about people who are facing the possibility of going bankrupt.
Forbearance, for all its huge pleasures, is a wonderful approach, but is totally without a statutory framework. Does that need to be considered? Even when forbearance is operating and we are talking about keeping people in a family home which they would otherwise have to have left, is forbearance right if, as a result, they can neither heat that home nor feed themselves there? These are issues that we do not get quite right; there is a black-and-white approach to them. This amendment tries to say, “Perhaps we can begin by gathering the figures and thinking again about how these things operate”. Using the rights and privileges that the Revenue has above and against all other creditors is obviously important in terms of making sure that we maximise revenue, but that is not necessarily right in terms of societal norms and values. I am sorry to have taken so long but it is important to get that on the record.
Regarding Amendment 58H, I am glad that the Minister feels that there is something there to look at again. I would be happy to participate in any meetings or discussions he might have, wearing both, or one of, my hats. I beg leave to withdraw the amendment.
Viscount Younger of Leckie
Noble Lords will be aware that the reforms to the debtor-initiated bankruptcy process being introduced by the Bill remove the order-making function from the court and replace it with a new administrative process. These are minor and technical amendments to the “Extent” provisions in Clause 78 relating to those reforms. Individual insolvency law is a devolved matter in Scotland and these reforms will have no substantive effect on legislation in Scotland.
The jurisdiction of the adjudicator is limited to the determination of bankruptcy applications received from debtors who meet the jurisdictional criteria of having resided or traded in England and Wales for the required period. However, certain consequential amendments made by the reforms extend to Scotland. The purpose of these amendments is to ensure that we have the legal power to make all those consequential amendments that are necessary to give effect to the reforms being made in England and Wales. The amendments make no substantive changes to bankruptcy law in Scotland, which is a devolved matter. I therefore beg to move.
Lord Stevenson of Balmacara
My Lords, we have read the amendments and recognised the points. Rather surprisingly, given the volume of correspondence that we received on everything else in the Bill, we received no comments from anyone on this matter and therefore have to rely entirely on our own judgments. In this case, we are happy for the amendments to go forward.
Viscount Younger of Leckie
My Lords, given that this is the last group of amendments in our Committee discussions, I would like to place on record my thanks to our Deputy Chairmen and the clerks who have masterfully steered our way through all the amendments; to the Bill teams involved; to the Hansard writers who have admirably recorded our discussions and, indeed, were obliged to stay somewhat later than the extended time allotted last week; and to the Doorkeepers for their unstinting assistance.
We have given the Bill careful and detailed scrutiny and I pay tribute to noble Lords opposite as well as my noble friends who have participated in our debates. Although there have been areas on which we have not wholly agreed, which we will discuss further on Report, as one would expect from this House, they have brought a depth of knowledge and analysis to the wide range of issues covered by the Bill. I would also like to thank my noble friend Lady Stowell for the part she has played and my noble friend Lord Popat and many other noble friends who have assisted and supported me and my officials.
The Government’s amendments to Clause 79 have two effects. The first is to commence all powers to make subordinate legislation by statutory instrument on Royal Assent. This is to assist with the orderly commencement of the Bill’s provisions. I should make it clear that these amendments should not be seen as suggesting that all the powers in the Bill will be exercised straight after Royal Assent, or indeed at all. Some are reserve powers which will be needed only if certain circumstances apply—for example, Clause 45 on the powers of sector regulators. Amendment 60AD adds further provisions to the list in Clause 79(2) which are to come into force automatically two months after Royal Assent without the need for a commencement order. I beg to move Amendment 60AA.
Lord Whitty
My Lords, it is probably totally inappropriate for me—as I am probably the person who has been here least in recent days—but I would like to join the Minister in thanking the clerks, the support staff and everybody who has participated on all sides during these debates. I also thank the various Chairs, including our current Chair. I extend that to the Minister and his colleagues and to the noble Lord, Lord Marland, who, many moons ago, started us out on this course.
Lest the Minister think he is going to get away after that, I have a couple of questions on this virtually final clause. As he says, the powers do not necessarily come in at the first date that is stipulated here in terms of implementation, but the Secretary of State will be able to implement them. In Amendment 60AB, he has already referred to proposed new paragraph (b), which relates to concurrent powers in Clause 45. The Minister may recall that during the debate on this there was considerable concern expressed about how the balance between the sector regulator and the new CMA would work. My understanding is that there will be different times in practice when each of the concurrent powers cease or are otherwise redefined; does that mean that, as it stands, Clause 45 would come in all at once on whatever date the Secretary of State determined after the first date? In fact, there may be a different date for Ofcom and the CMA or Ofgem and the CMA or the other sector regulators. It would be heavy work for the Government if they were all to come in at the same time, because there are different considerations in each of the sectors and there will be some inquiries which are still ongoing and some which need to be completed. In any case, we will probably have to return to the substantive issue on Report to get further clarification—if not to move further amendments—but it would seem that if all of Clause 45 were brought in applying to all sectors at the same time, it would be a problem.
My second point is about proposed new paragraph (f) in Amendment 60AB. This effectively says that anything that does not happen to be listed here can nevertheless come into play on the first day after Royal Assent. It seems, since Her Majesty will be signing them off, that this is getting fairly close to his late Majesty, King Henry VIII, in that if you do not specify the date in which various sections come into operation, then bringing any Section forward to an immediate date—even though it is not specified in this commencement clause—could seriously disturb the arrangements of the particular bodies that apply. For example, if there is a commencement of a particular power to either commence or cease, people need to know that in advance. Therefore, it is important that the Bill specifies that rather than have a catch-all ability for the Secretary of State, or some future Secretary of State, to bring any clause into play on the first day. If the noble Viscount tells me that this is normal, of course I shall withdraw it, but it is not something that I see in many pieces of legislation. Perhaps he could clarify the position.
Viscount Younger of Leckie
I thank the noble Lord, Lord Whitty, in the sunset of this Bill, for bringing up these issues, which I regard as quite technical in terms of the timing. I appreciate what he has asked and it is obviously my business to get back to him with some answers. It may help him to know that it is the powers only that will be commenced on Royal Assent; the substantive provision will come in separately later. It might help to facilitate the commencement of the Bill. That is the reason for it. It should reduce the number of commencement orders and the commencement dates. It is important for me to re-emphasise exactly why we are bringing in this issue. However, I might not have addressed his concerns entirely but I would be more than happy to take up this matter later and give him a proper response in writing, with a copy placed in the Library.
(a) section 19;(b) section (Power to remove concurrent competition functions of sectoral regulators);(c) section 51;(d) sections 66 to 69 and Schedule 21;(e) sections 74 to 80;(f) any other provision so far as is necessary for enabling the exercise on or after the day on which this Act is passed of any power (arising under or by virtue of that provision) to make provision by regulations or order made by statutory instrument.”
“( ) Part 1;
( ) sections 11, 13, 15, 16 and 17;”