Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020

Baroness Bowles of Berkhamsted Excerpts

Thursday 2nd July 2020 Lords Chamber

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, the government loan and delayed payback mechanism in this statutory instrument gives the electricity suppliers time to work unexpected higher charges through to customers. By delaying four quarters rather than three, the extra cost can be fed into the retail price cap to ensure that higher prices do not hit in the winter months. It is all very logical but, in the retail price cap, will any account be taken of the fact that it is not domestic energy consumption that dropped due to lockdown? Working from home, having children at home, extra cooking, baking, computer use and other household activity has led to increased consumption, and putting these levy-related costs on to domestic supply later on is retail picking up the tab for disruption in industrial consumption.

For those on low income, where fuel poverty is a serious matter, any rises are dreaded. What planning is being done for how the levy cost blip will be reflected in the price cap? Will the retail share of the levy blip be limited to cover, say, 30%, or whatever the 2019 domestic percentage of household electricity consumption is, and not the higher percentage that will probably happen in 2020 due to lockdown? Will it be reversed out of the baseline in later cap updates?

My back-of-envelope calculation for the spring quarter, based on the £100 million cap, has a possible maximum levy of around £125 million, over 28 million households and using 30% of total electricity. That share would come out at only about £1.50 per household for the quarter. Will that be the kind of maximum increase allowed? To some, even that is significant. Further loans are presently ruled out, but is it not the case that an elevated levy is likely in later quarters, as overall consumption and market prices remain depressed?

The Government said in their consultation that suppliers should absorb some of the costs, that being the reason for not giving 100% cover, and the payback will then be mutualised among suppliers extant in a year’s time—not least in case some go bust. Once the price rise comes in, all levy costs will surely be clawed back, but what will be the effect on consumers if some suppliers go under, including where there are advanced payments? Are those lost as unsecured creditors? Finally, have the consultation responses been published? I looked for them on the BEIS website but did not find them, and it is not really a public consultation without seeing the responses.

Corporate Insolvency and Governance Bill

Baroness Bowles of Berkhamsted Excerpts

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 23rd June 2020 Lords Chamber

[Baroness Warwick of Undercliffe (Lab) [V]]

I added my name to Amendment 13 and I set out in Committee my concerns about the Bill. As I said then, I fully support the intention behind it—that the disruption caused by Covid-19 should not be allowed to trigger the failure of otherwise financially viable companies—but I was anxious, and I remain anxious, that some of the permanent and far-reaching proposals would be damaging to pension funds and to their members in the longer term. I assumed that this damage was unintended and was caused by the speed with which this package of protective measures had had to be introduced, and I am pleased that the Government have gone some way to acknowledging this in the amendments they have brought forward.

Other noble Lords have set out in detail the problems that the Bill would cause as currently drafted. I emphasise just one point in relation to defined benefit pension schemes. The stability and effectiveness of the current system in dealing with insolvency has depended on unsecured pension debts ranking side by side with debts owed to other unsecured lenders. This has underpinned all valuation funding and covenant discussions. The super-priority status granted by the Bill to finance debts in an insolvency following a moratorium undermines that stability and endangers members of affected pension schemes, while preventing the PPF acting effectively as creditor. As I said in Committee, it also undermines the role of the regulator. However, the Government have clearly made efforts to address these concerns and go some way to addressing the issues raised by me and other noble Lords. I have been convinced that the Government want to make this work and will ensure that the PPF has access to and influence on discussions about recovery plans.

The Secretary of State will have access to considerable Henry VIII powers in the Bill and will be able to intervene swiftly if it seems that restructuring plans and insolvency procedures are being abused, to the detriment of pension scheme members. So in thanking the Minister for the way he has responded to the concerns we in this House have expressed about the Bill, I urge him to stay alert to any attempts to undermine the assurances he has given that the position of pension scheme members will not be weakened, and that their lifeboat—the protective umbrella of the PPF—will not be undermined in any restructuring and insolvency discussions.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I draw attention to my interests in the register. I support Amendment 13 and what has been said already about it. I am a signatory to that amendment, but I shall concentrate on Amendment 14. The Times this morning reports that Intu, owner of shopping centres, is seeking a standstill on loans from its banks, otherwise it will go into administration. Without commenting on the merits of the case, save to mention that coronavirus has stopped rent payments, the facts are writ large: it is all in the hands of banks.

The idea of a moratorium is as a formal standstill, a breathing space for a company to trade out of its problems, get back on its feet or at least find a way to reorganise without the situation deteriorating due to a feeding frenzy of creditors, each trying to get at the assets before someone else does. For all essential suppliers other than financial institutions the moratorium terms are that they must continue with normal supply, with no demands for up-front payments or elevated prices that would destroy cashflows and undermine the purpose of a moratorium. But not for banks: they have no constraints and are free to demand accelerated payment. So there is a feeding frenzy exclusively reserved for the banks.

--- Later in debate ---

[Lord Callanan]

My Lords, the amendments in my name make provisions relating to pension schemes in the moratorium and the restructuring plan. Although the moratorium is not an opportunity for employers to walk away from their liabilities, it may become the point at which preparations for and discussions about a restructuring proposal begin. Where the pension scheme would be a large unsecured creditor in any insolvency, should the employer ultimately fail, restructurings can have a significant and immediate impact on the expected outcome of the scheme.

There is the possibility that the company may seek to reschedule payments to provide working capital to give time to shore up its operations. This might result in lower payments to the scheme for a period of time. A rescue may also involve certain other creditors, such as new lenders providing rescue finance, taking security over company assets. This would mean that there would be less available for other creditors, including the scheme, in the event that any such rescue ultimately failed.

Some insolvency procedures are designated as “insolvency events” under existing pensions legislation. One effect of such designation is that the Pension Protection Fund has a statutory role to play, acting as a creditor in place of the trustees of eligible schemes. However, the new procedures are different. They are not qualifying insolvency events, as they are focused entirely on giving the company every opportunity to achieve a rescue as a going concern. This would be the best outcome for a pension scheme: moving forward with the support of its newly rescued sponsoring employer.

Nevertheless, there is concern that these procedures could result in the pension scheme being disadvantaged as an unsecured creditor of the company. The PPF, as the provider of protection for members of eligible schemes in specified circumstances, could potentially face a greater loss. An example of this would be if the company subsequently fails and the scheme falls into the PPF with a larger deficit than it originally had.

Consequently, it is agreed that there is a need to build in specific protections. These focus on the interests of the scheme and its members, and the interests of the PPF and its levy payers. This would be by ensuring that the PPF has a seat at the table in any restructuring proposal and that its voice is heard. After all, it is the statutory compensation scheme for members of eligible defined benefit schemes, and ultimately bears the risk for the scheme should the company subsequently fail.

The challenge has therefore been to strike the right balance between the interests of the trustees, the board of the Pension Protection Fund, the company and its creditors. Taken together, these amendments achieve this balance. They provide for both the PPF and the Pensions Regulator to get appropriate information in the case of both a moratorium and a restructuring plan. The regulation-making power will allow the Secretary of State to provide for the board of the PPF to act in the place of the trustees of the scheme as a creditor in certain circumstances. The board of the PPF and the Pensions Regulator will have the right to the same information as creditors, concerning the start and end point of a moratorium and any change in the monitor, in specified circumstances. The board of the PPF will have the same rights as trustees to challenge in court the monitor’s or director’s actions in specified situations where the interests of the trustees as a creditor are considered to be unfairly harmed by those actions.

Where a restructuring plan is proposed and the company is a sponsoring employer, provision is made for the board of the PPF and the Pensions Regulator to receive the same information sent to creditors, in specified circumstances. This means that they are informed that a proposal has been made and they can then consider what action, if any, to take.

In respect of both the moratorium and the restructuring plan, where the trustees of a PPF-eligible scheme are a creditor of the company concerned, the proposed amendments provide a regulation-making power. This power will give the board of the PPF the ability to exercise the creditor rights of the trustees; again, in appropriate circumstances. These rights include attending the creditors’ meeting, voting on the restructuring plan and making representations to the court. The powers are drafted to allow an appropriate balance between the trustees and the Pension Protection Fund’s interests by allowing creditor rights to be exercised concurrently where appropriate. Conditions can also be placed on the exercise of any rights given to the board of the PPF.

Restructuring will always involve trade-offs. Employees will be concerned that the rescue ensures that their jobs are secure, but at the same time they will be interested in the impact on the company pension scheme if they are a member. The changes tabled in my name have balanced the interests of employees and scheme members with those of a company and its creditors, giving them all the best chance for survival, in our view. I beg to move.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I welcome the amendments tabled by the Government to address the position of the Pension Protection Fund and the Pensions Regulator where there is a relevant scheme. The amendments give them the right to be notified of moratorium events and give the Pension Protection Fund rights to challenge the monitor or directors, vote as a creditor and make representations to the court.

An amendment on the issue that remains unaddressed was originally tabled in Committee by the noble Baroness, Lady Altmann; we have tabled one on Report with her support. The noble Baroness, with her great experience in pensions, will speak next.

Amendment 15 concerns the status of pledged assets and whether the court can give permission for their disposal without the Pension Protection Fund’s permission. In the absence of an amendment, those assets are not protected, which unravels the basis on which settlements over funding and deficits are made with trustees.

The effect of that is twofold: the actual disposal of the assets, which may be unfavourable to the pension scheme; and, even without any of that happening, the fact that such a possibility exists raises doubts about the numerous pledges that underpin contribution agreements. It is far from desirable to have to revisit them but, without any assurance, it would seem necessary for trustees to think about that and seek more cash funding. That would be bad at any time, but when companies are facing more difficult times due to the pandemic and its after-effects, it would be particularly unwelcome. That is the reasoning behind the amendment, and I know that other noble Lords are well able to illustrate the problem further.

--- Later in debate ---

Moved by

[Baroness Bowles of Berkhamsted]

14: Clause 1, page 13, line 48, at end insert—
“(f) banks and other financial creditors may not seek to accelerate payment.”

[Baroness Bowles of Berkhamsted [V]]

I thank noble Lords who signed the amendment and spoke in support. The noble Lords, Lord Hodgson and Lord Holmes, and my noble friend Lady Kramer all spoke from experience about how banks will behave to extract cash. The noble Lord, Lord Adonis, asked what grounds the Government had for thinking banks could be constrained. The noble Baronesses, Lady Drake and Lady Altmann, expressed concerns about gaming. The noble Lord, Lord Stevenson, admitted that the amendment was persuasive. There is consensus that the focus is people.

The Minister’s answer is simply that if the banks press for too much, the payment will not happen and the moratorium will end. That does not stop the accelerated payments and death by a thousand cuts. From the cash flows and other information they have about their clients, banks are well able to know how much they can take a company for and to pace their demands until the money is gone or they have pressurised the business into other lucrative financial arrangements. It is game on.

I am not convinced by the answer about financial stability; the Minister knows this is a subject I know very well. Contracts on market operations do not have to end; it is simply the acceleration of payment on lending that needs restriction. Every pound that is required over and above the general terms existing pre-moratorium is tantamount to reaching through and picking the pocket of employees, pension schemes and small businesses.

The scope given to banks and other lenders to press their advantage during moratorium is too great. It can remove the very breathing space that is the objective of the moratorium. I have not heard any expression of limit to reasonableness other than some kind of banking self-control caused by a moratorium end if the banks get too greedy. As my noble friend Lord Fox said, it is simply tiptoeing around the banks.

To save jobs and businesses and protect pensions, banks must be far more equally in the moratorium. No amount of employee consultation can blunt the banks, and I wish to test the opinion of the House.

--- Later in debate ---

[Lord Fox]

My Lords, very briefly, it seems that the solution of the noble Lord, Lord Hodgson, is very elegant, and, like the noble Lord, Lord Vaux, I am struggling to find out why the Government might not accept it. One of the things that has come up on a number of occasions is the need for speed for both the Bill and decision-making: “We do not have time to talk to the workers”; “We do not have time to do this.” This is an opportunity to take one moment out and review whether this move—a pre-pack—is in the best interests of all concerned. I cannot see why the Government would not support it, and I expect that the Minister will stand up and wholeheartedly embrace Amendment 45 shortly.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I supported the pre-pack amendments in Committee and have done so again. The reason for the amendment in the name of the noble Lord, Lord Hodgson, is simple: reference to the pool is not happening, and bad pre-packs are. Like others, I do not consider all pre-packs to be bad, but it is unquestionable that some bad deals are going on.

The Government are reinstating a provision to give themselves powers that have recently lapsed. I do not wish to prevent that but, as the noble Lord, Lord Hodgson, said, that power has already lain for too long—for five years—without regulations being forthcoming. Due to coronavirus, more deals and insolvencies are likely, and there will be horrid cases, as the noble Lord, Lord Hodgson, said. The noble Lord, Lord Vaux, also reminded us again of the storm that is about to come—or the “tsunami”, as my noble friend Lord Palmer said. Every day we already hear of more, and some are a rip-off of creditors, as the noble Lord, Lord Mendelsohn, said in Committee and as the noble Lord, Lord Vaux, reminded us. The evidence is that insolvency practitioners can easily tick boxes to cover themselves. It is happening.

This amendment is simple and complete: use the panel that has been set up. In Committee the Minister was critical of the fact that the panel is set up in a light-touch way rather than having a regulatory power, but it is like that because government wanted it that way. If the Government want to come forward with powers for ARGA to take over the job—and to make ARGA happy—I will be there in support. But that is not here now, and nor are other regulations. So let us not hurt the public still further by having the recovery from Covid littered with scandals of cosy and inappropriate pre-packs. This is another feature of how the unfairness built into the moratorium will work, with pressure for restructuring, where the big winners will be the financiers. The least we can do is to have some assurance that the deal meets the standard of reasonableness.

[Lord Stevenson of Balmacara [V]]

My Lords, my name is on Amendment 46, as I strongly support the noble Baroness, Lady Neville-Rolfe, in her attempt to revive the powers taken in the small business Act 2015. We supported her in 2015 and pressed then for action to be taken against the abuses which were occurring in the pre-pack cases that came to light at the time.

However, as the noble Baroness said, thanks mainly to the rhetoric of the noble Lord, Lord Hodgson, and my noble friend Lord Mendelsohn, the Government have done a U-turn. Therefore, purely on consistency grounds, it is logical and right that we should support Amendments 37 and 38 in the name of the noble Lord, Lord Callanan. When he responds, I hope that he will confirm that he intends to use these powers and to act urgently.

I have been in discussion during the past couple of weeks with the noble Lord, Lord Hodgson of Astley Abbotts, about his Amendment 45. In the absence of government Amendments 37 and 38, I would have backed his proposal. However, I have an old-fashioned view about statutory powers being operated by non-statutory bodies such as the pre-pack pool. Given that the powers sought by Amendment 45 are contained within those to be taken under Amendments 37 and 38 and that, as the noble Lord, Lord Hodgson, admitted, there are some problems with the existing arrangements —the noble Lord, Lord Vaux, called them “murky” and denigrated the standards being achieved—I am minded to support the Government on this issue.

Corporate Insolvency and Governance Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 17th June 2020 Lords Chamber

I strongly urge the Minister to give as full and as expansive an explanation as possible—and in particular, to be clear about whether the Government are truly committed to the Pre Pack Pool’s continued existence, and whether they feel it is their responsibility or role to keep it functioning. I certainly urge him to give some indication of what they will do, not just to plug this obvious gap in the long term, but—in the short term, at this critical moment—to ensure that the measure, which should have been exercised previously, is at least available when it is most needed.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, there is little to add to what has been said. I signed both the amendments, and I agree with what the noble Lords, Lord Hodgson and Lord Vaux, have said, and with what they have proposed both in these and in their other amendments. I also associate myself with the remarks made by the noble Baroness, Lady Altmann, and the noble Lord, Lord Mendelsohn, about pre-packs. Profitable as they may be for some, and right in some instances, they are too frequently a blot on our corporate landscape. They are despised by the public, who recognise them as being too often against the public interest.

It is important to take forward a fulsome operation of the Pre Pack Pool, by mandating its use. As has been explained, there was a provision that could have enabled that, but it expired recently, possibly through unavoidable circumstances. As the noble Lord, Lord Hodgson, also explained, there is a greater need for that provision now, because otherwise even the moratorium, and the good intentions that lie behind it, could be undermined.

Who refers something to the pool could be left open, but it is probably better to specify, as the noble Lord’s amendment does. It does not have to be the purchaser; it could be a monitor duty, making the process look more independent.

As the noble Lord, Lord Hodgson, says in his amendment, there should also be some kind of positive response from the panel. He put “not unreasonable”. I tend to favour something a bit more positive, possibly that it is “fair and reasonable”, which carries an overtone both of an open market or arm’s-length value and of being viewed in the round—again, as the noble Lord, Lord Hodgson, explained in his speech. Indeed, he even used the word “fair” in explaining what should happen.

If we compare the two amendments, which I did when I signed up to both, it comes down to where they are placed in the relevant schedule and whether to link them to connected persons rather than to associates, as the noble Lord, Lord Vaux, has done. As “connected persons” was the language used in earlier debates on the Bill, that is the placing that caught my eye, but I would not bet against the noble Lord, Lord Hodgson, having found possibly the better spot. However, now that we are alert to it, an optimal draft could be produced, and I urge the Government to do that.

Corporate Insolvency and Governance Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Tuesday 16th June 2020 Lords Chamber

[Baroness Meacher (CB) [V]]

My Lords, I thank the noble Lord, Lord Vaux, for his detailed amendment to Clause 12, and support it most strongly. I apologise to the Committee; I must be responsible for the fact that I am listed ahead of the noble Lord, Lord Vaux, who will move his amendment, but I hope that my brief comments will nevertheless make sense. As it stands, Clause 12 interferes in an unacceptable way in the commercial activities between companies. By restricting the ability of suppliers of goods and services to terminate contracts with a company that has entered a relevant insolvency procedure, the clause puts the viability of supplier companies in jeopardy, particularly if they are small, as other noble Lords have mentioned, or if their client company represents a substantial percentage of their sales.

Along with the noble Lord, Lord Vaux, I am particularly concerned about the provision in Clause 12 to allow the Secretary of State to remove exclusions in Schedule 4ZZA using subordinate legislation. As the Bill stands, small companies are excluded from the restrictions on supplier companies, so they can, at the moment, terminate their contract to supply goods and services to a client company when it enters relevant insolvency procedures. This is surely absolutely essential if we are to encourage new entrants to the supply sector and if we are not to threaten the future of small companies. As I understand it, the amendment in the name of the noble Lord, Lord Vaux, would permanently protect small companies from the effects of Clause 12.

Another control over supplier companies is the restriction preventing them from requiring payment of outstanding charges as a condition of continued supply. Such a restriction surely also risks the financial viability of the supplier. I question the morality of a Government interfering in the marketplace to protect one company, apparently at the expense of others. Will the Minister explain how the Government justify the different treatment of companies involved in insolvency proceedings and their suppliers? Why do the Government appear unconcerned about the future of supplier companies? I agree with the noble Lord, Lord Hodgson, that a major problem with the Bill is that it combines understandable emergency measures to deal with the Covid crisis with permanent Henry VIII powers. This has been the matter of most concern to the Delegated Powers Committee, of which I am a member.

In conclusion, I hope that the Minister will accept the amendment in the name of the noble Lord, Lord Vaux. If not, I hope that the noble Lord will bring it back on Report.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I declare my interests in the register as a company director. There are many good amendments in this group that I support, but I will limit my speech to the ones in my name, relating to creditor priorities and to review, and to a couple related to them. The background to Amendments 25 and 40 is the same as that already raised by the noble Lord, Lord Hodgson, and the noble Baroness, Lady Kramer. The position of financial institutions is uniquely privileged in that they will inevitably continue to be involved but they are not bound by the same conditions of moratorium as others who must continue to supply. They are not bound to normal supply terms or the ipso facto clause, and are free to accelerate and increase their demands, achieving elevation to both the amount and priority of their lending.

As well as the issue of priority, enhanced charges and advancement extract funds from the company, which is counterproductive to the very rescue that is the purpose of the moratorium. The effect of both those possibilities would be to leave unsecured creditors and, notably, pension deficits in a worse position in a subsequent insolvency. Put together, the two effects make the price of the moratorium too high, and the financial institution behaviour pattern is compelled to happen.

I do not need to remind the Committee that the operation of banks is not geared towards benevolence. I wish they had that in their articles but they do not; they are geared towards maintaining their own capital and their own profit, which is encouraged by bonuses and regulation. There have been some appalling examples of banks squeezing SMEs, for example as elaborated in the FCA’s report on RBS’s Global Restructuring Group, which this House debated last June. It is clear from that FCA report that there is no desire to interfere in contractual terms.

--- Later in debate ---

[Lord Thomas of Cwmgiedd [V]]

I put my name down to speak on these amendments because of the very wide terms in which they were drafted. From the perspective of legal certainty and the importance of the London financial markets, it seemed that the Government’s overall policy of excluding financial service contracts was completely the right one, and the suggestion of these amendments was to remove part or all of that protection. However, from what has been said in this debate, it is clear—at least, I hope it is clear—that what gives rise to the concern really relates to the position of pension funds. It seems to me that this is a much narrower subject and it turns on the question of the priorities that will need to be clearly spelt out in the event of an insolvency.

Earlier, I raised the rather difficult issues that relate to priorities. This debate seems to underline the importance of that. I hope the Minister will have the opportunity to clarify precisely the way in which the priorities as between financial service contracts and a pension fund are to be resolved in the event of an insolvency.

[Baroness Bowles of Berkhamsted [V]]

My Lords, it is a pleasure to follow many speakers with great experience in the pensions world. As the Minister said in speaking to the first group of amendments, the objective of moratoriums in this legislation is that they will succeed and that companies with a hope of surviving will do so. But that will not always be the case. Insolvencies or other arrangements may follow. The moratorium structure rewards those who continue to supply, with an enhanced priority in a subsequent insolvency. It rewards financial institutions in a particular way that is identified as giving priority to creditors, including those who would have just ranked alongside pensions as unsecured creditors but are promoted above them.

As has already been mentioned, the Minister said in responding to the first group of amendments that some change will be made to exclude accelerated debt from super-protection. That does not sound like even as much as was covered in the group 1 amendment of the noble Lord, Lord Hodgson, which I signed, but it is a start. Nevertheless, I am still concerned that it elevates all financial debt above pensions, as explained by the noble Baroness, Lady Drake. If I heard the Minister correctly, he implied that without being given priority, in return for none of the things that bind other companies, banks would not play ball—I paraphrase what was actually said. The reason why the banks will play ball is to get benefits. That still means that they will make greater demands and ask for bigger fees. They will still accelerate payments even if they do not get priority, but that will still suck funds out, because banks do not have a payment holiday.

I am attracted somewhat to what the noble Lord, Lord Balfe, said on whether the PPF will survive. I note that having to stand behind pensions actually comes from European legislation. I believe the UK was taken to court on this subject. Do the Government still stand behind legislation protecting pension benefits, or is that a piece of EU legislation headed for the dustbin of broken promises?

Like other noble Lords, I think that the Government need to think further about the legislation’s effects on pensioners, the Pension Protection Fund, the Pensions Regulator, pension trustees, companies contributing to the PPF, which will face elevated contributions, and those self-same companies facing deficit repayment schedules that will need to be greater to compensate for the actions in this legislation, as well as the fact that many schemes are much further in deficit because of the current crisis situation that we are in.

Also, what does this blackmail change—I call it “blackmail” because that is what it sounded like when the Minister explained it—to the insolvency waterfall say about the stability of legal agreements and contracts in the UK, if securities that have been pledged to pension funds can be sold from under them through a retrospective law change made without any warning or notice? That is what this priority change is. “Moratorium” might have been trailed, but “moratorium” means delay, not a change of priorities and the inclusion of financial institutions in special arrangements for no consideration—for that is what it is: no consideration. It is more than simply consequential to the running of a moratorium.

Various amendments in the group aim to prevent harm to pensions, and my probing Amendment 118 suggests that the PPF should be consulted in any compromise arrangement. It could or probably should be made stronger and require consent, but then I do not really need to speak to it because the noble Baronesses, Lady Drake and Lady Altmann, have come up with extremely sound, detailed amendments. I support them and commend them to the Government.

I realise that the Minister indicated in his email last night that some movement in this direction will happen. He has also said that the Government will give creditor rights, which is the issue covered by Amendments 63 and 64 in the name of the noble Baroness, Lady Drake, but the extent and effect of those rights is important. I therefore remain concerned. Changing the ranking of creditors also opens up questions about, “Why just that change?” There are arguments, with which I have a lot of sympathy, that say pension deficits should have a higher ranking in insolvency anyway, given their origin as deferred pay. We will come to other provisions on that in the next group.

I am now quite glad that we have not finished the pensions Bill because, if these new priorities are enacted, they will take a wrecking ball to the difficult consensus that was being reached on the speed of paying down deficits, and other provisions coming from the regulator regarding its powers and what it would do to make sure that deficits were paid down. We will certainly have to take into account these new circumstances in this Bill and seek follow-on protections if it proceeds largely in the format it is in at the moment.

In summary, this group has four sensible proposals, independently made from across the House, that have significant overlap: scrap the financial institution priority, which weakens the position of pensions; ensure that pledged securities are not sold without the consent of the PPF; amend the Pensions Act 2004 so that a moratorium is an insolvency event and triggers a PPF assessment period; and have the PPF involved, with vetoes, in restructuring arrangements. I commend a composite of those arrangements to the Minister and I hope that productive discussions can follow because, welcome though the moves already flagged are on the PPF having creditor rights, we need to make sure that they fit the bill and that pension deficits do not still face significant losses.

--- Later in debate ---

Moved by

[Baroness Bowles of Berkhamsted]

23: Clause 1, page 11, line 22, at end insert—
“( ) the prescribed part of a company’s net property available for the satisfaction of unsecured debts under section 176A of the Insolvency Act 1986”Member’s explanatory statement
This is a probing amendment to discuss the effect of priority advancing on unsecured creditors and in particular pension fund deficit, notwithstanding the power for rules to rank the order in inserted section A18.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I will also speak to the other amendments in this group. In some ways, I see this group as a continuation of the previous debate concerning the effect of the moratorium on pension funds and small companies. Amendment 23 inserts the prescribed part for unsecured creditors into the A18 priority. It should in fact have had an extra condition to it that said “when there is a pension scheme” but, in the amendment rush, that somehow got left off. Noble Lords will see that in the explanatory statement I did reference pensions as being of particular relevance.

This was an idea I had as part of the continuing story of the adjusted insolvency waterfall and the damage that can be done to pensions. My objective was to probe how else the prescribed part could not be diminished or how there could be some form of compensating balance. Another way could be by putting an extra or reserved part into the higher priority, designated as a first tranche reserved towards pension deficit, with any remaining pension deficit still sharing in the later general pool of the prescribed part. For example, if the prescribed part is raised to 30% so that there is more available in general for pension deficits, as other noble Lords have suggested, could the extra 10% be moved to be given a higher exclusive priority reserved for pension debt alone?

As I said before in the group on pensions, the Government have lifted the lid on changing priorities, and what has to date been accepted as an uncomfortable compromise regarding the position of pension deficit is now open to challenge. Why should there not now be some extra reserved part or special preference in the mix, especially given the point made more than once already that pensions really belong with wages and salaries? They should never have been demoted to unsecured creditors.

As a generality, I see the raising to 30% as beneficial, not just for making more available for pension deficits but also for SMEs. Irrespective of whether there is any changed priority as part of the compensating measures that one will have to start looking at, the rise to 30% —which has been proposed before—is given more impetus in the light of what is happening in the Bill. I beg to move.

[Lord Hendy [V]]

My Lords, my contribution dovetails with that of the noble Baroness, Lady Bowles, whose remarks I support. I speak to Amendment 56, the purpose of which is to preserve for the unsecured creditors a larger share of the assets available for distribution than the legislation currently provides. The legislation recognises that something must be preserved for them, but the question is: how much?

The first part of our amendment seeks 30% of the “prescribed part” of the company’s property. This is an arbitrary figure, intended to be reasonably fair. The problem is that the “prescribed part” is fixed by a formula and is capped. I understand it to be £800,000, or thereabouts, but I confess that I am no expert on this. Consequently, 30% may be a very small sum and spread very thin. The second part of the amendment therefore proposes that, in any event, if assets are being sold to pay debt, as is usual, at least 30% of the proceeds should be reserved for the unsecured creditors, leaving 70% for the secured and other creditors.

I add a word about unsecured creditors. Included in this, for reasons I touched on earlier, will be much of the debt owed to employees of the company, which falls outside that preserved for preferred creditors. The unsecured creditors also include all the workers for the company who are not classed in law as employees but who are nominally self-employed or engaged through a personal company. This is a significant sector of the workforce—over 5 million people in total.

As I mentioned earlier, it is right that workers should have priority because, unlike secured creditors, they cannot diversify the risk of the company becoming insolvent, and their stock of labour is ever-diminishing. There is another reason that they should be given preference: they spend their remuneration; they do not put it in hidden bank accounts in the Cayman Islands. They spend it because they and their families have to live on it. This creates demand and is good for the economy and for business.

Also included among the unsecured creditors are the many SMEs in the company’s supply chain. This may involve dozens of suppliers who have supplied materials, items or labour on credit, but cannot recover them. In turn, they may employ hundreds or thousands of workers. It is right that, in a complex and interconnected economy, unsecured creditors and their workers should be guaranteed an appropriate slice of the cake.

--- Later in debate ---

[Baroness Bloomfield of Hinton Waldrist]

I take the noble Lord’s point. The point of the Bill is to provide emergency relief in the current crisis. The restructuring planned provisions that we have tabled and are taking forward in the Bill are flexible and will permit complex funding arrangements to be used in a company rescue. This will bring our regime more in line with other jurisdictions where debtor in possession rescue finance is well established. These measures will add to the UK’s existing first-class restructuring and insolvency framework and ensure that it keeps pace with developments in other highly regarded international jurisdictions.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I thank everybody who spoke in this wide-ranging debate. We have explored further how the Bill has been a catalyst for looking at some long-standing issues with the fairness of the insolvency waterfall in general. I hear what the Minister says about the April update but that is still broadly based on the original tenets.

As the noble Lord, Lord Hendy, explained so well, the situation is different in modern times, with many more what would have been employees and other workers falling to the unsecured creditors. It is also they who are squeezed in the robbing of Peter to pay Paul that goes on in the adjustments to provide the impetus for a moratorium. We heard an interesting suggestion from the noble Baroness, Lady Altmann—one she has made before, perhaps in connection with the Pensions Bill—that, instead of looking at Section 75 debt, which tends to make you throw up your hands in horror and run away, we should look at technical provisions or the amount that would go to the PPF; that is another part that could be preserved.

I thank noble Lords. We have more food for thought. I accept that new Clause A18 is perhaps not the place to introduce new priority protection—that probably belongs more in Schedule 3—but these matters are serious enough that they must be brought back at a later date. For now, I beg leave to withdraw the amendment.

Amendment 23 withdrawn.

--- Later in debate ---

[Lord Palmer of Childs Hill [V]]

I will not speak for long, bearing in mind the time constraints. I am concerned by Amendment 75 and the mention of the Small Business Commissioner. I wonder whether, perhaps separate from this debate, the Minister could say what successes the Small Business Commissioner has had. I have made previous speeches in your Lordships’ House on his ineffectiveness.

The amendment before us now sounds sensible but it does not use the normal term “small and medium-sized enterprises”; it mentions “small business” and “larger businesses”. From my professional life, I know that many firms that consider themselves small I would consider large, and that many firms that are large would consider themselves small. The vagueness that this amendment would introduce to the legislation, if it ever got in, would not be useful.

The Small Business Commissioner was really set up to deal with late payments, which of course affect small companies. Here, the amendment is trying to give the Small Business Commissioner a much wider remit, but I have never seen great success in the small remit it has.

While I am on my feet—in a theoretical sense— I want to mention that another Minister speaking from the Front Bench took issue with my comment on HMRC and VAT. She said that VAT was not being given special priority in the Finance Bill 2019-21. I advise her to look at Clause 95. Perhaps the noble Lord the Minister will write to me on this matter.

[Baroness Bowles of Berkhamsted [V]]

My Lords, this group deals with a range of issues which I broadly support, but I shall keep to those amendments with my name on.

I am not quite sure what my Amendment 73 is doing in this group, but its purpose was to ensure that the interests of SMEs are specifically taken into account when reviewing amendments to legislation made under Clause 18, the Henry VIII clause. Clause 21, governing the time-limited effect of Clause 18 amendments, states that regulations made under Clause 18 must be held under review, and revoked or amended if they are no longer expedient or proportionate. My amendment adds a third option if they cause harm to SMEs, as I fear that SMEs could fall between the two stools of expedience and proportionality.

I signed Amendment 78, concerning the FRC, because its replacement is long overdue and it is hard to understand why this top recommendation from the Kingman report has not yet come about. I know that there has already been one consultation on it because I replied to it over a year ago, so what happened to that and why is there prevarication? There is still so much more about the unsatisfactory past of the FRC that could come out—it is constantly dribbling out. It will taint ARGA if it is perceived as just the FRC by a new name, which is what the delay is doing.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts]

My Lords, I have Amendment 129 in this group. It seeks to equalise the different levels of protection afforded to firms in trouble under this legislation. It has been brought to my attention by a firm of solicitors that specialises in insolvency. The two critical dates in the legislation are 27 April, after which general protection is available; and 1 March, just under two months earlier, after which protection is afforded, but only if a statutory demand for payment has been made.

However, a statutory demand is not the only way that a company can be caused to fail. It is possible to go for a default judgment in a county court or a liability order in the magistrates’ court and proceed directly to a winding-up. Firms that are subject to either of these other two procedures do not benefit from protection from 1 March, but from 27 April only.

Firms are able to object and to fight these proceedings but, from 23 March, the country was in lockdown. Understandably, courts have found it more difficult to inform defendants about cases brought against them and, in many cases, smaller companies—where the proprietor is running the business almost on their own —may have been involved in self-isolation. They are therefore unable to access proper legal advice to protect their position. My amendment seeks merely to extend protection for these cases, particularly those affecting small companies, from 27 April to 23 March—the date on which lockdown began and the inequality of legal arms may have commenced.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I can be brief because my amendment in this group contains a separated half of the GB-Northern Ireland pair of amendments relating to small businesses that I spoke about in the previous group, so I do not need to explain those again, and in the interests of time I will forgo speaking on anything else.

[Lord Wallace of Tankerness [V]]

My Lords, I will seek to be brief. The point I will make relates to retrospection, which Amendment 129 from the noble Lord, Lord Hodgson of Astley Abbotts, perhaps illuminates; he is trying to make some of the provisions even more retrospective. I will not work through all the detail; suffice it to say that in Schedule 10 we are asked to enact a provision that would retrospectively void a court order that had been legally pursued and granted. In the words of the Government’s Explanatory Notes, this

“may lead to the petitioner becoming liable for the cost of doing so.”

I do not doubt that there are important business and commercial reasons underpinning these provisions. I ask simply that the Committee proceeds with the utmost caution when making retrospective provision. I quote from the Constitution Committee’s seventh report:

“We recognise that the COVID-19 pandemic presents companies with considerable challenges and that the Government is rightly seeking to protect businesses and the economy as a whole … However, measures with retrospective effect are exceptional and undesirable in principle, requiring the strongest possible justification. We do not think the Government has yet made the case for them in this Bill.”


I simply invite the Minister, when he comes to reply, to try to make a justification and, if he is unable to do so in the time remaining in these foreshortened proceedings today, to undertake to make a response to the Constitution Committee’s report before the House meets for Report.

--- Later in debate ---

[Lord Fox]

My Lords, I associate myself with some of the comments of the noble Lord, Lord Hain, around works councils. In my past life, working with works councils, particularly in the Netherlands and in Germany, I found them to be a positive, long-term force within companies. An earlier speaker mentioned that in private sector businesses, unions have low representation, which is why works councils should be important in this country, but on departing the European Union I understand that the Government are going to reduce or negate the need for companies to have works councils, which is something to be regretted. What is also to be regretted is that we cannot have a proper debate on these amendments, which means that Report will inevitably have to go on longer.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I support the two amendments in the name of the noble Lord, Lord Vaux, that include changes to the definitions of the smallest businesses and a new definition to help first-year businesses. These both seem sensible. We have had a lot of instances in the various coronavirus reliefs where help is not extended to everywhere that might reasonably have been covered; therefore, examination of definitions in the light of that and other experiences seems worth while.

Corporate Insolvency and Governance Bill

Baroness Bowles of Berkhamsted Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020 Lords Chamber

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I draw attention to my financial interests, as in the register. Although we broadly support the Bill, it is a little frustrating. It does too much by permitting things in a fast-tracked temporary measures Bill, and too little because it has left out other important measures similarly well consulted on. The Minister may conclude that that balance is like Baby Bear’s porridge and just about right. Nevertheless, there are some lumps in the porridge. Expediency has meant that it is the business-favouring parts of the consultations that are being fast-tracked and the more social-facing, small business and employee-facing measures that are left out. I therefore ask the Minister for reassurance that the Bill is not seen as removing pressure from legislating other important reforms on corporate governance and reporting, ESG, insolvency practitioners, audit and replacement of the Financial Reporting Council. I certainly do not see it as a justification for holding off.

The moratorium provision was expected, but there may be traps in the way it works, especially in the event of a following insolvency. There are changes in the insolvency distribution waterfall, with unpaid moratorium debts, and pre-moratorium debts without a payment holiday, being given a new super-priority. Both the treatment of what becomes super-priority and what is “normal supply” disadvantage smaller suppliers. All their pre-moratorium debt is in the subordinated category and normal supply favours stronger creditors’ amounts of super-priority, as they will have contracted shorter payment terms. Will events be monitored, and rankings readjusted if the super-priority does result in outcomes with less in the pot for SMEs, unsecured creditors and pension fund deficits? Unfortunately, it also looks as though the slaying hand will be held by HMRC, with its new claims for extra super-priority, and by banks, as they are outside the ipso facto provisions. It may be that security is not exercised in moratorium, but where are the provisions that prevent banks charging special fees and hiking interest so they can profit in moratorium, or making repayment acceleration demands to secure larger sums with super-priority? Such actions will not help rescue companies, are unfair and should be restrained. That is not to say that the moratorium concept is unwelcome but, because we do not have the time now to weigh up all the checks and balances, it would be sensible to hold its operation under review, to see how it worked and for revisions in the light of unintended consequences to be brought forward.

The temporary suspension of winding-up petitions also has lumps. In a sense, it robs Peter to pay Paul and whether it is the potential petitioner or the company that is smaller, more at risk or more aggressive, is not always one way. I therefore recognise the compromise in trying to keep the period short. However, under Schedule 10, the courts could impose retrospective restoration costs on those required to withdraw petitions made under the current law. Unlimited, might that be a retrospective step too far?

I am conscious that fast-tracked emergency legislation is not appropriate for complex changes and additions, but a few simple things within the scope of the Bill could be achieved. My noble friends will say more.

I regret that there are not more provisions to assist with personal bankruptcy. Australia has raised both the payment time and the financial threshold for initiation of proceedings.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I remind the noble Baroness of the time limit.

[Baroness Bowles of Berkhamsted [V]]

What is happening in the UK? Additionally, I regret that the Bill does not include simple Companies House provisions on identity verification, enabling it to play a role in preventing rogue or criminal elements abusing the current crisis to commit fraud. Again, there has been consultation already, but how is that being followed up?

[Baroness Bloomfield of Hinton Waldrist]

I ask the noble Baroness to bring her comments to a close.

[Baroness Bowles of Berkhamsted [V]]

I intend to revert to the various matters I have mentioned with amendments.

Oil: Changes in Global Markets

Baroness Bowles of Berkhamsted Excerpts

Thursday 21st May 2020 Lords Chamber

[Lord Callanan]

The noble Lord is right. Companies across all sectors will be vital in our work to meet our 2050 net-zero targets. We want all business leaders in all sectors to make ambitious emissions reduction plans to help meet the commitments that we have set out under the Paris agreement.

[Baroness Bowles of Berkhamsted (LD)]

Given oil-related job losses and the likely continuing reduced oil demand, will the Government promote faster repurposing of UK oil-related industries, especially in the light of the EU revisiting the idea of building champion industries through joint state aid?

[Lord Callanan]

We want to encourage those industries to diversify as quickly as possible. Many are doing so and have already announced plans, but, ultimately, of course, this will be market led with government incentives being provided; we are doing that.

Covid-19: British Business Bank

Baroness Bowles of Berkhamsted Excerpts

Thursday 30th April 2020 Lords Chamber

[Lord Callanan]

Of course, at the moment we are focused on delivering the support that businesses need now, but we will continue to monitor and review all the schemes, now and in the future, to make sure that they are working effectively and helping businesses to get the support they need.

[Baroness Bowles of Berkhamsted (LD)]

Is the Minister aware of reports that some banks are requiring companies to freeze all loans and leasing with other financing institutions before agreeing loans, and that some are charging for personal contact despite arrangement fees being picked up the Government? Is such conditionality and charging allowed?

[Lord Callanan]

The noble Baroness makes a good point, but we have provided a generous guarantee scheme and we fully expect that all businesses will benefit from such schemes and that banks pass on the savings to borrowers. We have removed the forward-looking viability test, as I said earlier, but we constantly monitor all these schemes and seek to improve them where possible.

Competition and Markets Authority: Legislative and Institutional Reforms

Baroness Bowles of Berkhamsted Excerpts

Wednesday 8th May 2019 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I too welcome this debate and thank the noble Baroness, Lady Hayter, for securing it. It is a pleasure to follow the noble Lord, Lord Tyrie, and I recommend his speech at the Social Market Foundation earlier today, which I attended. I declare my interest as a director of the London Stock Exchange plc.

The proposals of the noble Lord, Lord Tyrie, are part of a wider review of the competition regime, and the consumer focus also fits with the direction of travel of the inquiries into the FRC and audit, and growing concern over the power of large companies, especially in services, along with new business methods and contracts and new types of dominance and oligopoly, as the noble Lord, Lord Whitty, said.

If there is a generic flaw in the state of our laws concerning companies, it has been in expecting that the public good, or the consumer, can be served in a derivative manner—for example, by promoting competition for the benefit of consumers. It cannot be presumed that competition always serves the public well, when bad practices can be market-wide and indeed driven in that direction by the need to compete. Therefore, I welcome suggestions to have consumer protection powers that mirror those in competition and that, for both consumer protection and competition, the procedures should be capable of collecting more and earlier information and of being swifter in delivery and more effectively enforced.

Given that the noble Lord, Lord Tyrie, has delivered a raft of suggestions and has rightly observed in his letter that further consultation and details will be needed, will the Minister let us know what form of consultation is envisaged? Will it be by the Government, the CMA or both, and when? Will all the proposals be progressed together, or can some be done more quickly?

Several of the proposals would align with practice and developments in competition authorities in other countries, where there is already, to some extent, a track record. The UK has been seen as strong in competition matters and, while that might be true on observing state aid rules and permissiveness for mergers—some would say too true—somehow we have got into the position, laid out by the noble Lord, Lord Tyrie, on page 39 of his letter:

“The UK is not only one of the best jurisdictions for companies to defend a competition case; it is one of the best jurisdictions to lose one”.


That is because the review system allows opening up of the whole case, allowing new evidence even if it could have been submitted sooner to the competition authority. That is not the norm for competition cases in other countries.

Further, our system allows setting aside of remedies until the end of the review, for which procedures have become overly long and have departed from the written procedure that was originally envisaged. If a company loses a case, although the fines available match those in other competition authorities, at 10% of global turnover, the amounts levied have ended up being much lower. With some types of business, the length of the investigation, added to by any review and deferment of remedy, can be sufficient for the company to benefit substantially, taking a substantial market share or playing a part in distorting business practices by establishing new norms or even completing the whole chain of the value cycle in that business. Then, if the fine is small, it can become a price worth paying.

It is a tough call for a regulator to ask simultaneously to have more powers and to prune the scope of legal appeal, but in this instance a good preliminary case to do that has been made. I have some sympathy with the point made by the noble Baroness, Lady Neville-Rolfe, about doing the investigation and being the judge, but that does happen with other regulators as well. What irritated me even more when I had oversight of competition in the EU was the lack of transparency, in terms of not being able to find out what was going on, sometimes even for the business that was under examination—that drove me to go to Luxembourg, to the ECJ, and to sit through the Microsoft tying and bundling case. Actually, I thought the judges did a very good job of digging out the facts, but without that I would really not have had a good understanding of what had been going on, and the public are often left not knowing what has gone on.

Most of the other proposals have two common threads. The first is making the consumer interest specific and stand-alone, enabling bad practice to be dealt with, whether or not it has a competition aspect, and making procedures and remedies the same as under competition cases. I will take a great interest in how that progresses and will measure it against the Australian law of unconscionable conduct in commerce. As I have suggested before in debates about corporate liability, it would be a good idea to have some similar catch-all available in our law. I want all bad behaviour in commerce to be caught, certainly for consumer protection but also between other organisations or businesses.

The second thread is enhanced powers, applicable for both consumer and competition matters, ranging from greater information-gathering powers to more flexible procedures regarding market studies and investigations that do not tie into an inevitably long timetable. This is important considering the speed and innovation of modern business, particularly in the digital age. But how “Get it done quickly” is to translate into law while allowing thoroughness will need some care, more resources and rapid appointments to panels.

The idea of having a Financial Services and Markets Act Section 166-type inspection, paid for by the company, is floated as a possible additional tool and a way of getting expertise. This idea was put forward in the context of the Kingman and CMA reviews of the FRC and audit, and it pops up here as well. It needs examination as to how and when it would be used so that it does not get out of hand, as did the monitoring trustee arrangements that the EU Commission put in place for Microsoft. I recall criticising that arrangement for creating a “Microsoft regulator”, and in fact the Commission lost that part of the case at the ECJ. We therefore need to examine whether, because of the nature of business, it has got to a situation where we are saying that we need to create mini internal regulators, but Section 166 may have become overly fashionable.

I agree with requiring more individual responsibility, and that must cover senior managers and executive committees, not just boards. I am pleased to see the suggestion of more use of director disqualification; again, I have recommended several times that when there is a serious finding in business governance and culture, there should be an automatic review of whether the directors should be recommended to the courts for disqualification. It is possible for the Secretary of State to instigate investigations, but that should be kept for special cases. In general, it should not have to rely on government intervention.

I concur with other noble Lords that this is a robust set of proposals, and they have my support and that of these Benches.

International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019

Baroness Bowles of Berkhamsted Excerpts

Tuesday 12th March 2019 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have followed IFRS for some significant time, and it was part of my remit as chair of the Economic and Monetary Affairs Committee of the European Parliament. I also declare an interest as a director of the London Stock Exchange plc. Not only does that entity use IFRS, it is also a benefit for international companies to be able to list and report in IFRS or other standards deemed equivalent to UK standards. Having said that, my experience with IFRS has taught me to be wary of its limitations.

This is a very important statutory instrument because it is about the accounting standards under which companies prepare their financial reports, and of course those financial reports are audited using those standards and form a key part of annual reports. IFRS therefore plays a key role in audit and the standard of audit, and it will not have escaped your Lordships’ attention that audit, audit regulators and auditors have been or are coming under scrutiny in inquiries by Kingman, the CMA, Brydon and the BEIS Select Committee.

One of the lesser realised things about IFRS is that it is meant only for group level consolidated accounts, its purpose being international comparability. It is only for group level consolidated accounts that there is an EU requirement. A recent article published on 8 February this year by Nick Anderson, a member of the International Accounting Standards Board, states:

“it is important to remember that IFRS Standards, if only because of their international nature, cannot reflect in detail specific requirements of the multitude of different capital maintenance regimes among the more than 140 jurisdictions that now require the use of our Standards”.

However the UK, under the FRC, has gone further and converted UK GAAP into IFRS-like rules. An interesting impact assessment from the FRC, published in March 2013, explains:

“The FRC is issuing FRSs 100 to 102 (the Standards) following extensive consultation to move current Financial Reporting Standards (current FRS) towards an IFRS-based framework”.


The rest of the impact assessment looks rather more like a business plan for the big four, and, of course, we know from the Kingman review that the FRC is a captured regulator that was designed to take account of the companies and professions that it regulated.

IFRS tends to flatter accounts—the accounts of stakeholders—because it allows the inclusion of unrealised profits. It is this expansion of the conceptual framework of IFRS into company-level accounts—which continue to be updated as IFRS is updated—that has distorted UK financial reporting and made it depart from company law, which requires a prudent approach not a neutral one, and is central to the ongoing inquiries concerning audit.

Why do the public think they have been let down by auditors and had no warning? Auditors have followed a righteous-by-process approach of “true and fair according to accounting standards”, which has always been the FRC’s touted recommendation. The FRC has always wanted to get rid of parts of company law that it does not like. It wrote to the DTI in 2005 saying, “In short”, the Accounting Standards Board,

“is firmly of the view that outmoded and costly company law rules must swiftly be brought up to date”.

Against that background, it has taken a fair bit of campaigning and interrogation to get fulsome recognition that the company law true and fair test is an overarching requirement. From watching the evidence heard in the BEIS Select Committee from auditors, the fact of separately complying with company law seemed lost on most of them, yet it is in the Companies Act.

So I am grateful for the clear statement made by the noble Lord, Lord Henley, in reply to my Written Question HL13690. I am sorry it is one of 96 such Questions in and around these kinds of issues, but it has done a lot of good so far. Anyway, the Answer states:

“The true and fair test in section 393 of the Companies Act is the overarching test that is applied to a company’s annual accounts. If a company produces accounts, in accordance with the legal requirements, which are inconsistent with the Companies Act requirement to give a true and fair view, then the directors must depart from the accounting standards to the extent necessary to give a true and fair view. Particulars of any such departure, the reasons for it and its effect must be given in a note to the accounts.


The IAS Regulation (EU Regulation No. 1606/2002) includes requirements to consider the accounting standards system as a whole. Article 3(2) of that Regulation provides that a new form of international accounting standard can only be adopted if it is not contrary to the principle that an undertaking’s accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss. This requirement ensures that no new form of international accounting standard is adopted for use in the UK if the application of that standard would lead to companies in general contravening the true and fair test”.


As I said, I thank the noble Lord for the comprehensive reply.

This statutory instrument will replace the EU regulation, but two things are clear from the noble Lord’s reply: company law has an overarching true and fair test; and the true and fair principle applied in the endorsement process does not replace the company law test. Would the Minister confirm that I have stated that correctly and that the true and fair principle requirement in the UK endorsement process does not replace the Section 393 company law true and fair test? That is an essential statement in the context of how financial reporting and audit must be conducted for me to approve these regulations. It is a little pedantic, but some may say that this is a new law compared with the EU one that previously applied.

The second major part of this SI is about who we can trust to be in charge of IFRS standards, both in the UK and representing the UK in international discussions, because the instrument provides the Secretary of State the ability to delegate that decision-making and representation to a new body, named in the Explanatory Memorandum as an endorsement board to be hosted within the FRC.

I do not know when the SI was drafted, but perhaps it is unfortunate that it does not take account of the Kingman report into the FRC, which yesterday the Secretary of State confirmed would be followed. The search for the new chair and deputy has started as part of a process that has to lead to a change of culture, new terms of reference including the public interest, and the ending of self-regulation and cosy relationships with stakeholders consisting of the very companies, entities and professions to which regulation from the FRC applies.

The Explanatory Memorandum states that the endorsement board is being set up as a subsidiary body. The noble Lord, Lord Hodgson, has already drawn attention to the fact that it appears that that process is well under way. In any event, it seems that the setting up of a new and independent regulator requiring legislation would also take a certain amount of time. However, Kingman also said that there should be various immediate changes. As well as a change to the FRC leadership, he specified improvements to the FRC’s internal systems and controls, including a centrally managed complaints procedure. I am not sure how that is going because I am still seeing reports of aggressive and threatening letters from solicitors being sent to complainants. That is not the culture or central procedure that I want to see.

Kingman also recommends applying the provisions of Managing Public Money and applying the Regulator’s Code, the Freedom of Information Act and the Public Contracts Regulations. There is little evidence that that has yet been done, and there is nothing much in this statutory instrument, other than FoI, to ensure that the body receiving delegated powers is compliant with the list of things that Kingman has recommended.

I will not repeat what Secondary Legislation Scrutiny Committee’s Sub-Committee B has said, other than to recognise that it has made the point that the Secretary of State will need to be confident that the FRC is in an appropriate condition to be able to host the new body properly. In paragraph 11 of Sub-Committee B’s report, there is an explanation of the work that BEIS is doing with the yet-to-be-reformed FRC to build capacity to set up the new endorsement board. The usual stakeholders have been consulted. It looks as though they are the same ones that it is recommended the FRC gets less attached to—businesses which are the bodies to be regulated and their advisers. At a guess, might that happen to include the big four? I am not quite sure what the robust transparency provisions that the stakeholders have helped with are. The paragraph states that the SI includes the “long term public good”, but that comes from the EU regulation, not stakeholders, and anyway it refers to the standards, not the endorsement body.

The unreformed FRC will be in an oversight position, but the policy intention—it is just an intention; it is not written in the legislation—is that the chair and board members will be operationally independent. What does that mean if there is oversight from somewhere else? What does it mean if there are HR processes, which I would take to mean recruitment of the people on the board? Where is the public input? Where does it charge the body rather than the standards with the public interest? When is the FRC applying the public interest recommendations from Kingman? Will delegation be deferred until then, and, in any event, has not the setting up of the endorsement board already been influenced in the old and suspect way? The whole project seems to have been rushed, premature and, I fear, unreformed.

Finally, why hand over important negotiations on UK requirements in IFRS to a regulator that has been so publicly criticised and, despite ongoing efforts, will have a long way to go to free itself from the cognitive capture that is so embedded throughout its organisation?

I understand the sensitivity that tweaking standards can tweak profits, and the UK way is not to have politicians doing standards, but there is the relatively unique circumstance in accounting standards that the profession dominates the standard-setting process. Bankers do not set banking standards and market participants do not set market operation conduct rules, so why should accountants set their own standards? At the very least, the Secretary of State needs to retain the ability to intervene.

In the EU, endorsement and representation power lies with the Commission, and the Parliament also has a veto. I do not see why in this instance, because there is this unusual circumstance of accountants setting their own standards, there should not be the intervention of some kind of Secretary of State and parliamentary procedure. Yet again, I find that Australia appears to be doing things better, because that is just what it has done. I would say that, if it is good enough for Australia, it is good enough for the UK.

--- Later in debate ---

We are obviously going to debate these matters in considerably greater detail when we get to the other SI that I have promised. As I made clear, this SI deals purely with a no-deal exit. It is important for business to provide it with the certainty that it needs. Other matters can be dealt with in due course as we develop the endorsement board and consider how it should work. I look forward to debating those matters in greater detail with all noble Lords when we come to that SI, just as in due course we will have to deal with the primary legislation required to deal with some other points that will result from the consultation and the report by Sir John Kingman, although that will be some time in the future.

[Baroness Bowles of Berkhamsted]

I have a couple of comments. The Minister referred to this being done under the withdrawal Act, and that is quite correct. There is no problem with the way in which Regulation 7 and things around it operate. That is a copy-and-paste job and exactly what the withdrawal Act provides for. I do not think that that Act requires there to be any delegation or sub-delegation. It enables such things to happen but does not require them. But it is in there and at this stage we are unlikely to resist the statutory instrument going through.

However, given everything that has been said, the next statutory instrument, which is also affirmative, will have to contain constraints and requirements ensuring proper, not-captured behaviour for there to be the confidence to allow it to go through. There is no problem with the Secretary of State doing an endorsement. There are people who can assist and advise, and the Secretary of State can perfectly well organise consultations and those kinds of things, so I would not consider delay of the next stage sacrosanct. Given the whole situation, the nature of this debate and the concerns from all who have spoken, I hope that that message about the next stage can be taken to the Secretary of State. I would be very unhappy about trying to pass something in the next month or so without there being many more safeguards.

[Lord Henley]

At this stage, all I can say is that I note what the noble Baroness has said. Regarding when the next SI will appear—whether it will be in the next month or so—I cannot say, but I will certainly keep her informed and let her know exactly what our thinking is.

Trade Marks (Amendment etc.) (EU Exit) Regulations 2018

Baroness Bowles of Berkhamsted Excerpts

Wednesday 6th February 2019 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, as with earlier instruments on exhaustion and patents, this was debated on 14 January in Grand Committee, where noble Lords raised questions about the consultation and impact assessment process. Noble Lords also put some questions on technical points specific to this SI, seeking clarification on ongoing proceedings, costs and priority dates of pending applications. I repeat my thanks to all noble Lords who shared their time and expertise with the Committee on those matters. I addressed many of the points raised in my letter of 21 January to Members of the Committee. I hope that my answers were helpful and have met the expectations of noble Lords who took part.

The Government have laid these regulations to ensure continued protection in the UK for EU trademarks, thereby providing businesses with maximum security, clarity and certainty. Under current law, businesses can obtain an EU trademark, which, as a unitary right, provides protection across the whole of the EU. When we leave the EU, that protection will no longer extend to the UK. To address this, the Government will create a comparable UK trademark for every EU right that is registered on and before exit day. These comparable trademarks will inherit earlier filing and priority dates recorded against the corresponding EU trademarks and will be fully independent UK rights that can be challenged, assigned, licensed or renewed separately from the original EU trademark. Each comparable trademark will be created automatically and free of charge, meaning that a minimum administrative burden will be placed on rights holders. Those not seeking to hold comparable UK trademarks will be able to opt out by notifying the IPO. The instrument also sets out the Government’s approach for accommodating the 85,000 trademark applications which are pending before the EU Intellectual Property Office on exit day.

A number of technical issues were raised both during and after Grand Committee. Given my answers in my letter to noble Lords, I shall focus on those outstanding concerns which were raised subsequent to my letter. The noble Baroness, Lady Bowles, inquired in Grand Committee about the effect of priority dates on pending applications and compatibility with the Paris convention. I was pleased to have a meeting with the noble Baroness and trademark legal professionals to discuss these and other matters that she raised. At that meeting I clarified that we believe the instrument is compatible with the UK’s obligations under the provisions of the Paris Convention for the Protection of Industrial Property, which contain rules on claiming international priority.

I remain confident that the chosen approach provides the most practical means for preserving the rights of pending EU trademark applications. In respect of issues identified with the conversion of EU trademarks, I have also confirmed to the noble Baroness that such rights will be preserved via provisions contained in the Interpretation Act 1978. A copy of my letter, which addresses the noble Baroness’s concerns on both the Paris convention and conversion rights, will be placed in the Libraries of both Houses. I found our discussions on these two issues most helpful, and was grateful to the noble Baroness for her valuable insight as a trademark and patent attorney. Building on those discussions, I will ensure that her points are reflected in business guidance to be published by the IPO closer to exit day.

In conclusion, these regulations are vital to ensure that businesses do not lose their trademark protection in the UK, and to ensure the continued effectiveness of our domestic trademark system if we do not secure a deal with the EU. I hope noble Lords will support the draft regulations, which I believe provide businesses with clarity and certainty regarding their intellectual property. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, first, I declare my interests. I am a retired European patent and trademark attorney, but, if I were to un-retire, I would find myself among those unfortunates who, going forward, would no longer be able to practise before the EUIPO in respect of trademarks and designs. This matter—that a part of professionals’ representation is cut off—is not one we have discussed before. My noble friend Lord Clement-Jones was interested to hear what the Minister had to say on the issue, and to confirm my interpretation that current UK representatives will no longer be representatives is correct.

This SI largely replicates the provision in the withdrawal agreement, so it is not really a no-deal SI; it is the shape of the SI that will happen in due course—if there is a deal—possibly with some minor changes to dates and other things, but I could not see anything that differed from what one would expect under the withdrawal agreement.

As the noble Lord, Lord Henley, has explained, I had a long meeting with him and officials from the department and the IPO; I thank them very much for their time and for listening to my views and those of some representatives. I apologise to the noble Lord, Lord Adonis, but I did a little secret consultation myself, just to make sure that, being retired, I had not lost the plot. What I wanted was a statement that there would be continuity of rights at the point of Brexit so that, although the SI was internally consistent under UK law—it gave clear instructions as to what our courts would decide—it would also neatly fit within the usual conventions. That required only an assertion, which we have effectively had, that the rights continue—rather than dying and, in some way, being resurrected.

The letter that the noble Lord, Lord Henley, has now placed in the Library, and which was addressed to me on 4 February, is interesting. First, he deals with the priority rights that I discussed in the Moses Room in Grand Committee. The second issue I raised was about an EU trademark application that was refused before Brexit but, under the rules, it can be converted to a national application by applying at the EU end for three months. There was concern that there is no mention of what happened to those applications and to that conversion right. Was is lost or was it not? Some representatives thought that it was lost.

The letter refers to the Interpretation Act, and it is worth pointing out what that Act says. It confirms that an Act that repeals an enactment does not affect,

“any right, privilege, obligation or liability acquired, accrued or incurred under that enactment”.

The letter goes on to say that the EU trademark regulation will constitute EU retained law for the purposes of the European Union (Withdrawal) Act 2018; and that pursuant to the power in that Act, it is repealed and replaced by the UK regulation. This solves the problem. There is a definite assertion here that the right to convert will be retained but the conversion will be done entirely before the UK IPO, instead of starting it off in the EU. This general application of the Interpretation Act would apply to any regulations, not just these; it might be applied to those on patents that we have just discussed. That is one reason why I asked that the letter be put in the Library. It is possible that we contemplated this when we were going round the loop of the withdrawal Act, but I had misplaced it in my mind, and that might be the case for other noble Lords.

I am satisfied that it is “job done” on the confirmation of continuity and the issues I sought reassurance on. I am also grateful to the Minister for explaining that the Government will take into account the various other measures we raised, which are much more to do with practice.

The salient point here is that some 60% of trademark applications are made by individuals for their own businesses, without professional assistance. So it is quite important that the advice the IPO is able to give keeps them up to speed with changes that they might not be aware of, such as that they still have the conversion right and for how long.

There is still a matter to be dealt with: for nine months, there are latent rights hanging about. If you file a trademark application, it might look like the way is clear and then, all of a sudden, it is not, because people want to continue with the one they have under the EU. The question is how the IPO is to deal with notification, so that an applicant knows the full picture before making decisions that might be otherwise prejudicial to their rights when deciding whether to go ahead and have notice sent to people or to withdraw their application. My proposal was that they have to have the right to be able to suspend until that nine-month period is over, if it looks as though there is something in their way. Obviously, this is not a matter for this statutory instrument, but it will turn out to be a matter of concern if a significant number of those 85,000 applications are continued with. From what I can gather, it is likely that more than half will be, so intervening applicants will have a difficult nine months to navigate.

[Lord Stevenson of Balmacara (Lab)]

My Lords, we discussed this SI in some detail in Grand Committee and so there is very little more to be said. The Minister, in his letter of six and a half pages—or is it eight?—covered a number of points also. We have since then had another letter—I have printed it out on my own machine and have it in front of me and so can measure it; it is a page and a half, if he wishes to know the detail—which has added a considerable amount, including the rather interesting extemporary view that the UK Interpretation Act 1978 confirms different powers about these regulations, and which might be of more relevance in some other areas of work that we still have to consider.

We are very lucky to have the expertise of the noble Baroness, Lady Bowles, available to us on this issue. She has been able to keep us right on a number of points. My point follows from hers in that this SI is moving away from simply trying to establish what continuity would mean in the context of a no-deal exit by offering something valuable to those who hold trademarks in the EU and wish to continue business in the UK after Brexit.