Greensill Capital

Lord Callanan Excerpts

Wednesday 14th April 2021 Lords Chamber

[Baroness Smith of Basildon (Lab)]

My Lords, the government response fails to grasp the seriousness of this issue. Not only did the former Prime Minister lobby his mates through the backdoor for Greensill Capital but it now emerges that the Government’s chief procurement officer, Mr Crothers, a full-time civil servant, was also an adviser to the Greensill Capital board, apparently en route to becoming a director. I have here his letter to the noble Lord, Lord Pickles, in which he says he was given approval to transition back to the private sector, that it was not contentious and, he says, “not uncommon”. At best this is sloppy governance; at worst it is dodgy in the extreme. I have two questions: who gave that approval and how many other cases are there across Whitehall? The Minister should have that information. If he does not, I will settle for him writing to me. The Minister is known to be an honourable man. Is he really comfortable defending this?

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

I thank the noble Baroness for her questions. She will be aware that the Prime Minister has asked Nigel Boardman to conduct a review that will look into all the decisions that were taken around these developments and the questions of supply chain finance, which was the original point of the question that was posed. I say to the noble Baroness that I think it is a good thing that there is some cross-fertilisation between civil servants and the private sector. It is wrong for people to have experience purely in the public sector. These are long-standing arrangements. It has happened under Governments of all political persuasions.

[Baroness Kramer (LD)]

My Lords, I hope very much that the Minister will rethink his response to the noble Baroness, Lady Smith. But my question is focused on the UQ itself. There are many press reports that the British Business Bank is now taking a look at the loans that Greensill made under the CBILS programme, but what investigation is going on to understand how on earth a company with as many red flags as Greensill was accredited to the CBILS programme in the first place? We all know that the British Business Bank told us, when we questioned why there were such long delays in many of the challenger and alternate lenders getting approval to make loans under CBILS, that it was a very thorough accreditation process, so we need some proper answers to that. Can he also tell us whether Greensill was put at the front of the queue for getting accreditation, along with any other companies that came with recommendations from Government or Conservative Party members, in the same way as the VIP system for procurement of PPE worked earlier in the year, which the Government have acknowledged?

[Lord Callanan (Con)]

The noble Baroness makes a number of allegations that are not supported by the facts. Greensill’s applications for accreditation to both CBILS and CLBILS were assessed independently by the British Business Bank on the basis of the separate criteria for those schemes, which were designed to be accessible to a range of lenders in accordance with the goal of supporting lending to businesses impacted by Covid-19. A number of similar companies went through the same process and were also accredited to the schemes.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, I agree with the noble Baroness, Lady Kramer, about the surprising nature of the Minister’s response to the noble Baroness, Lady Smith. Is the Greensill scandal not a sign of a systematic problem going back decades through successive Governments, arising from an ideological desire to bring for-profit business ideologies into what should be decision-making for the public good? Is it not now clear that business and the Civil Service should be two separate schemes of employment, without a revolving door between them? Given the current level of embarrassment, will the Government consider legislation so that Ministers, particularly Secretaries of State and Prime Ministers, are limited by statute not to take any paying role that enables them to use for personal enrichment the knowledge and contacts acquired during what should be a period of public service?

[Lord Callanan (Con)]

I just do not agree with the fundamental point the noble Baroness makes. Of course it is important that all decisions taken by Ministers and civil servants are taken independently, but I return to my original point that it is a good thing that people have experience of the private sector—and that people in the private sector have experience in the public sector. There should not just be two distinct career paths which never meet. As long as the appropriate propriety and transparency are followed, it is a good thing.

[Lord Sikka (Lab) [V]]

My Lords, early last year three of Greensill’s major clients—NMC Health, BrightHouse and Agritrade—collapsed. This provided a reminder of the precariousness of its business model. We know that Greensill was not subject to capital adequacy tests by the FCA or the PRA, so how did the Government perform due diligence checks before approving it as a lender? Can the Minister give a firm commitment to publish all documents relating to Greensill’s designation as a lender?

[Lord Callanan (Con)]

I remind the noble Lord of the answers I gave to earlier questions. These decisions were taken not by the Government but by the British Business Bank, and there were also other non-bank lenders accredited under CLBILS. These were loans which the Government put in place in emergency conditions to save viable businesses. The whole object was to try to preserve jobs and employment in the economy. I am sorry if the Opposition do not think that is a good thing, but I think it is good that jobs are being preserved.

[Lord Mackenzie of Framwellgate (Non-Afl) [V]]

My Lords, the Greensill affair was a scandal waiting to happen. Lobbying has tainted our politics for too long—those are not my words, but those of former Prime Minister Cameron 11 years ago. He even described how it works: the lunches, the hospitality, the quiet word in your ear, the ex-Ministers and ex-advisers for hire. It has worsened since then, as it appears that current civil servants can now be hired also. This is an opportunity to do what the former Prime Minister should have done: shine a light on the whole sorry business. Can it really be true that Bill Crothers, who worked in Whitehall for eight years and founded the Crown Commercial Service, controlling more than £15 billion of purchases, was at the same time employed by Greensill Capital? It beggars belief and needs to be rooted out. Can the Minister assure your Lordships’ House that all documents and records involved in this serious allegation of high-level cronyism will be published in due course?

[Lord Callanan (Con)]

The Prime Minister has announced a review into this matter. I have seen the media reports the noble Lord refers to, but the Boardman review will cover all available facts. The Government will provide all necessary documentation to that review, and all participants have said that they are willing to provide the appropriate information as well. The noble Lord should give him a chance to do his work and see what he comes up with.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, the Prime Minister has said that the Greensill inquiry has carte blanche, so could the Minister assure the House that it will be able to look into the Scottish Government’s failed deal with Gupta and Greensill for the Lochaber smelter, which has lost the taxpayer half a billion pounds? Will it also look into the private meetings over dinner which Scottish Minister Fergus Ewing had with them, of which no records were kept and which were not reported to the Civil Service? The Cameron sleaze seems to have crossed the border to the Scottish Government.

[Lord Callanan (Con)]

The noble Lord is nothing if not firm in the points he makes. I can speak only for the British Government on this, as I suspect he knows very well. I cannot comment on or speak for the Scottish Government on their dealings. Our review will examine matters for which the UK Government are responsible. Perhaps he could take up his concerns about what happens in Scotland with the First Minister.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

My Lords, once again, all supplementary questions have been asked and answered.

Greenhouse Gas Emissions (Kyoto Protocol Registry) Regulations 2021

Lord Callanan Excerpts

Tuesday 13th April 2021 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Greenhouse Gas Emissions (Kyoto Protocol Registry) Regulations 2021.

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

My Lords, I beg to move that the regulations, which were laid before the House on 25 February 2021, be approved.

The statutory instrument is laid under the power of Section 8(1) of, and paragraph 21 of Schedule 7 to, the European Union (Withdrawal) Act 2018, to address deficiencies of retained EU law that arose from the withdrawal of the United Kingdom from the European Union. The purpose of this SI is to amend retained EU law related to the UK’s Kyoto Protocol registry to ensure that it will be operable in the UK. The statutory instrument is not introducing any new policy; it is simply ensuring continuity of the UK Kyoto Protocol registry, independent of the EU’s registry system.

As a party to the Kyoto Protocol, an international climate change treaty with which I am sure Members are familiar, the UK has a legal obligation to maintain a Kyoto Protocol registry. This registry enables the UK and UK-based account holders to hold and trade Kyoto units. Kyoto units are each equal to one tonne of carbon dioxide and can be traded on the international carbon market. Kyoto units held by the UK Government are used to demonstrate compliance with our emissions reduction targets under the Kyoto Protocol. Emission reduction commitments under the Kyoto Protocol covered the period from 2008 to December 2020. However, due to the time lag in collecting emissions inventory data, final accounting cannot be completed until several years after December 2020, hence the continued need for a registry. Future registry requirements under the Paris agreement, as the successor to the Kyoto Protocol, are due to be decided at COP 26 in November.

While the UK was a member state, the UK’s Kyoto Protocol registry was housed in the EU’s Consolidated System of European Registries. The UK has now established its own domestic platform to house the UK’s Kyoto Protocol registry, independent of the EU system. This platform is due to be operational in May 2021. The UK Kyoto Protocol registry enables the holding and trading of Kyoto units, just as a bank account does with money.

As an industrialised country with emission reduction targets under the Kyoto Protocol, the UK is allocated a number of units, known as “assigned amount units”. These units are held in the UK Kyoto Protocol registry. When finalising accounting for the Kyoto Protocol commitment period, countries have the option to trade or cancel any surplus units if they have met their emissions reduction targets through domestic action. The registry enables this activity.

Private entities can also open accounts in the registry to hold and trade Kyoto units generated through the clean development mechanism under the Kyoto protocol. The clean development mechanism allows a country with an emissions reduction commitment under the Kyoto protocol to implement an emissions reduction project in developing countries. Such projects can then earn certified emission reduction credits, each equivalent to one tonne of carbon dioxide, which can be counted towards meeting Kyoto targets. This mechanism can enable more cost-effective emissions reductions, and the emissions credits generated can be traded, thereby creating a carbon market.

This statutory instrument is about continuity and compliance rather than any substantive changes to policy. By amending the retained EU legislation relating to the Kyoto protocol, this statutory instrument provides a clear legal basis to operate and administer the UK registry domestically. This SI does not have any significant impact on businesses, charities, voluntary bodies or the public sector. The Environment Agency will continue its role as administrator of the UK Kyoto Protocol registry, as it did before our departure from the EU.

There are currently 112 businesses with accounts in the UK Kyoto protocol registry. The units and transaction history relating to these accounts are being transferred from the EU system to the new UK system hosting the UK Kyoto Protocol registry. As I mentioned, the new UK system is due to be operational in May 2021, which is when account holders will be able to register on the UK system to access their newly migrated accounts. Trading Kyoto units via the UK Kyoto Protocol registry should be possible from June this year.

Businesses with accounts in the UK Kyoto Protocol registry were given advance notice about changes to the registry while the transfer from the EU to the UK system takes place. The Environment Agency, in its capacity as administrator of the registry, continues to provide updates to account holders, and we are not aware of any concerns being expressed by those account holders. All four Governments of the UK nations have agreed with the purpose and content of this statutory instrument.

I therefore conclude by emphasising that I see the measures contained in these regulations as important, since they will ensure the UK’s ability to uphold its international commitments under the Kyoto Protocol, following our departure from the EU. I hope on this basis that noble Lords will feel able to support these measures and I commend these regulations to the House.

--- Later in debate ---

[Lord Callanan (Con)]

I thank all noble Lords for their contributions to the debate. The noble Lord, Lord Teverson, summed it up well. This is fairly uncontroversial territory and I am pleased that most Members are supportive certainly of the principle of this legislation. As I expected, most of the questions did not focus on the content of this fairly dry statutory instrument but covered a range of other areas connected to our emissions reduction and greenhouse gas policies. However, in an effort to be as helpful as possible to the Committee, I will endeavour to answer as many of those questions as I can.

The noble Lord, Lord Whitty, asked whether the methodology for measuring greenhouse gas emissions will not be changed by the UK. I can assure him that the UK will continue to report greenhouse gas emissions under the Kyoto Protocol using exactly the same methodology as it did when we were an EU member state. The noble Lord also asked whether the Kyoto Protocol allowances would be compatible with the UK ETS. I can tell him that, under the UK ETS, the Kyoto Protocol units will not be able to be converted to allowances, and international credits are not permitted in the UK ETS at this time. However, the Government and the devolved Administrations are open to reviewing the usage of offsets in future, especially in deciding how best to implement the carbon offsetting and reduction scheme for international aviation, or CORSIA as it is known, alongside the UK ETS.

The noble Lord, Lord Whitty, also suggested that the UK should include imported emissions in its climate target. That issue was also raised by the noble Baroness, Lady Bennett. In our view, targets should strive to follow the best available science and methodologies to account for emissions and it is currently standard international practice to set such targets based on territorial emissions. Including imported emissions would, of course, risk double-counting emissions that had already been captured in other countries’ national efforts.

The noble Lords, Lord Redesdale and Lord Grantchester, asked about the important subject of methane, as well as carbon. I can tell them that methane is covered under the KP and calculated as a CO₂ equivalent, following internationally agreed methodology provided by the IPCC.

My noble friend Lady Altmann asked about the costs of the new domestic registry system and plans to bring together all our climate commitments. The UK KP register has been developed as part of the same IT project as the UK emissions trading system registry. The two systems share a lot of the same IT functionality and we are able to maximise economies of scale and increase value for money by housing the two separate registries on the same system. I know that she will approve of that.

My noble friend Lord Bourne of Aberystwyth asked whether we have provided guidance to businesses affected by the change in the registry. The answer is yes, we have provided regular updates to account holders about the changes. Account holders were given advance notice that the UK KP registry would be inaccessible for a period while the transfer from the EU to the UK system took place. They were advised that, should they wish to trade Kyoto units before the UK registry had been successfully transferred on to the new domestic platform, they could open a KP account in another country’s registry. As yet, we have no evidence to suggest that any businesses with accounts in the UK KP register have felt the need to take that step.

My noble friend Lord Howell rightly expressed concern about the urgent need internationally to reduce emissions and he made some good points, particularly about the number of current coal-fired power stations built by China and elsewhere. That indicates the challenge that faces us for the COP meeting, but I reassure my noble friend that we are making progress on international efforts to address these matters. That is certainly a priority for the Government through our presidency of COP and we will continue to make those points strongly to other member states, jointly with Italy and in partnership with many other countries.

The noble Baroness, Lady Bennett, in her predictable manner, made many of the same points that she always makes in these debates, not many of which had anything to do with the subject facing us in the statutory instrument, but let me reassure her that over the past three decades the UK has achieved record clean growth and has met its climate change commitments. Those commitments are indeed world-leading. I understand that they will never be enough for the noble Baroness, but nevertheless we think that we have made considerable efforts. Between 1990 and 2019, our economy grew by 78% while our emissions decreased by 44%, which is faster than any other G7 nation. The Prime Minister is building on that progress and has set out his 10-point plan for the UK to lead the world into a new green industrial revolution. This innovative programme sets out ambitious policies and significant new public investment to support green jobs, to accelerate our path to reaching net zero by 2050 and to lay the foundations for building back greener.

The noble Baroness, Lady McIntosh, asked about the impact of the changes to the KP registry on account holders. The instrument impacts a limited number of organisations that hold the Kyoto Protocol registry accounts. Our analysis has shown that the costs to businesses are expected to be minimal, as the instrument allows for the continued functioning of businesses through the operation of a UK KP registry, rather than making any substantive changes to existing policy. As I mentioned, account holders were advised that, should they wish to trade Kyoto units before the UK KP registry had been successfully transferred on to a new domestic platform, they could access another county’s register, but so far, as far as we are aware, none has done so.

I can also tell the noble Baroness that the UK will not be lowering its climate standards or commitments as a result of leaving the EU. Our UK ETS is more ambitious than the EU system that it replaces—I know that this will be hard for some noble Lords to appreciate, but it is true. From day one, the cap has been reduced by 5%, which just goes to show that, as usual, we can do things better than the EU does.

The noble Lord, Lord Teverson, asked about the gap in trading for account holders following the end of the transition period. As I said, we have provided regular updates to them. I earlier covered the point about what they could do in the meantime. The value of CERs, the most commonly traded unit on the Kyoto Protocol registry, is approximately 20p.

The noble Lord, Lord Grantchester, asked whether the registry will be ready for June and why there are two separate systems. I can reassure him that the scheme will be ready for trading in June. That may be a commitment that I will regret, but I give him it. We are working closely with the Environment Agency and the IT software developer and keeping in regular contact with account holders to ensure that the transition goes smoothly. The registry must be connected to the UNFCCC international transaction log. Before being reconnected, it must pass a series of tests that meet the international standards. The registry is currently undergoing those tests and is on track to pass them. Once those tests are passed, the register will be able to go live.

In response to the question of the noble Lord, Lord Teverson, about linking the UK ETS with the EU ETS, of course we recognise the importance of international co-operation on carbon pricing and the important role that international carbon markets can play. We are indeed open to linking the UK ETS internationally in principle. We are considering a range of options, but no formal decisions have been made at this point on any linking partners.

I hope that I have been able to reassure noble Lords, following the breadth of their questions, that the statutory instrument is worthy of their approval. I think that the only remaining question was from the noble Lord, Lord Bourne, about scheduling a debate. In asking the question, he predicted the answer: this is a matter for the usual channels. I am sure that the Whip has taken careful note of his concerns and will relay them to the Chief Whip, who will consider them accordingly. With that, I commend the regulations to the Committee.

Motion agreed.

Audit and Corporate Governance

Lord Callanan Excerpts

Tuesday 23rd March 2021 Lords Chamber

[Lord Leigh of Hurley (Con) [V]]

My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In so doing, I draw your Lordships’ attention to my interests in the register.

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

My Lords, the Government’s proposals on audit and corporate governance reform will enhance the UK’s reputation as a world-class destination for business and investment. They complement the aim of the review of the noble Lord, Lord Hill, to increase the UK’s attractiveness as an international financial centre while maintaining the UK’s high standards of corporate governance and shareholder rights. The audit reform White Paper includes a specific option to exempt newly listed companies temporarily from the new requirements.

[Lord Leigh of Hurley (Con) [V]]

My Lords, in the 210-page impact assessment, somewhat extraordinarily, no monetary benefits were identified, only costs. The average FTSE 100 company’s annual accounts have some 200-plus pages that are barely read and the proposals will simply increase the number of those pages. Are we now in danger of moving away from legislation on corporate governance to legislation on corporate management by the state? Is this area not best left to shareholders to decide on? With directors to be made personally liable for management errors, is my noble friend the Minister concerned that business will simply move to be listed in a more business-friendly environment?

[Lord Callanan (Con)]

The impact assessment, in fact, includes examples of quantifiable benefits that will be refined and developed in further iterations of the impact assessment. I agree that shareholders have a vital role in holding companies to account and the White Paper gives them important new tools to scrutinise audit and corporate reporting.

[Lord McKenzie of Luton (Lab) [V]]

My Lords, from what we have read in the Sunday papers, this is a timely topic for debate and reporting on a long line of corporate failures, going back to Polly Peck, BCCI, Barings, Northern Rock, RBS, Carillion, BHS and, doubtless, many more. Throughout that time the audit market for major companies has been dominated by a few private sector accounting firms—now reduced to four. There is an urgent need to address the quality and effectiveness of audit. I presume that the Government support the proposals for a new profession of corporate auditors. What discussions have taken place with the profession itself on those proposals?

[Lord Callanan (Con)]

Indeed, I have had extensive engagement with the profession, including the big four and a number of smaller companies, as we seek to progress the legislation.

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

My Lords, in the RBS rights issue trial, Mr Justice Hildyard said that the purpose of Section 87A(2) of the Financial Services and Markets Act, concerning information to enable investors to make an informed assessment, had to be appropriate for the ordinary investor whose protection is the statutory objective. Does the Minister agree that the same logic must apply and be preserved in any changes to audit and capital maintenance statements? They are for the ordinary investor, not just expert users.

[Lord Callanan (Con)]

These proposals are to provide information to expert users and many of the ordinary readers as well. Therefore, both markets are to be fulfilled.

[Baroness Noakes (Con)]

My Lords, no self-respecting non-executive director would take on a directorship unless the company arranged adequate directors’ and officers’ insurance but the cost of cover has been increasing dramatically, alongside market capacity reductions. What assessment has BEIS made of the impact of its new proposals on the D&O market, with consequential impact on the willingness of good candidates to take on board appointments?

[Lord Callanan (Con)]

My noble friend makes a good point but the proposals will not provide a disincentive to people taking on new appointments. It is important to remember that the proposals for directors’ accountability apply only to the largest companies with revenues into the hundreds of millions of pounds and with hundreds, sometimes thousands, of employees. It is right that directors should take more responsibility.

[Lord Bilimoria (CB) [V]]

Professor Karthik Ramanna of the Blavatnik School of Government at Oxford said in the FT last week that corporate auditing is in crisis and that the UK Government have announced a bold set of proposals aimed at restoring public trust in audits and markets. The UK’s reputation as a world leader in corporate governance is highly prized and a vital part of what makes the UK an attractive place to invest and do business. What assessment have the Government made of the impact of these reforms on UK businesses, and how will the Government ensure that they will not affect the country’s ability to attract foreign investment nor stifle entrepreneurial spirit?

[Lord Callanan (Con)]

I do not agree that the audit market is in crisis. Some worthwhile improvements can be made, which is what we are proposing. The noble Lord will see that a full impact assessment is attached to the proposals.

[Lord Lennie (Lab) [V]]

My Lords, further to the question of my noble friend Lord McKenzie, can the Minister confirm that any annual report on the state of the City, as proposed in the report of the noble Lord, Lord Hill, will clearly outline how the dominance of the big four accountancy firms has been reduced?

[Lord Callanan (Con)]

The big four accountancy firms are important to the regime but we want to introduce more possible competition into it, which is why we are introducing the proposals for shared managed audit to try to bring up the capacity of medium-sized companies.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, given the clear struggle in the report, Restoring Trust in Audit and Corporate Governance, to find a workable model for auditing large UK companies, and given Deloitte UK managing partner Stephen Griggs’s comment to Accountancy Age, stating that,

“It is important that changes in audit are complemented by reforms to the governance of the UK’s largest and most complex businesses”,


does the Minister agree that the terms given to the UK listing review were fundamentally flawed? We do not need a more complex so-called competitive sector, but rather simpler, more secure, stable and auditable company structures.

[Lord Callanan (Con)]

We are discussing audit reforms and reforms to the audit market. I think that the noble Baroness may want to have a separate debate about reforms to company structures.

[Baroness Neville-Rolfe (Con)]

My Lords, I refer to my interests in the register. I hope my noble friend realises that this audit and governance package is onerous. It will place significant costs on businesses of all shapes and most sizes and is, I fear, unlikely to achieve a lot in practice. Does he not agree that the best and more immediate way forward would be for the existing, comprehensive rules to be enforced properly by everyone—including firms, auditors and, if appropriate, prosecutors—while minimising the burden of any new regulations?

--- Later in debate ---

[Lord Callanan (Con)]

I know that my noble friend is passionate about not imposing new burdens on companies. I share her desire, but we think that the current regime could be improved. There will be a 16-week consultation period, so we will take the time to get these proposals right, but I think that some worthwhile improvements could be made without damaging competitiveness.

[Lord Sikka (Lab) [V]]

My Lords, I have two points. First, in the absence of a central enforcer of company law, improvement in corporate governance is unlikely. Secondly, in the absence of tougher auditor liability and accountability, there are not sufficient pressure points to secure improvements in audit quality. When will the Government realise that their appeasement of big corporations and accounting firms is actually a recipe for more scandals?

[Lord Callanan (Con)]

We are not appeasing the big accountancy firms; many of them do not like some of our proposals. These are worthwhile reforms that will improve the market and help to bring about the state of affairs that the noble Lord refers to.

[Lord Reay (Con)]

My Lords, the White Paper proposals place onerous obligations on directors of larger businesses. Does my noble friend the Minister share my concerns that the reforms will discourage candidates, due to the increased and unnecessary liability? Further, does he agree that companies will face greater regulation, higher directors’ fees and indemnity costs at a time when the noble Lord, Lord Hill, is, sensibly, attempting to improve access to capital markets?

[Lord Callanan (Con)]

I do not agree with my noble friend. As I said earlier, accountability for directors applies only to those in the largest businesses—that is, those with revenues in the hundreds of millions of pounds and potentially thousands of employees. The new sanctions will apply only in cases where directors have clearly failed in their duties as set out in law, so I do not believe that there is a conflict with the proposals made by the noble Lord, Lord Hill.

[Lord Sarfraz (Con)]

My Lords, I declare an interest as set out in the register. Companies are staying private for longer and entrepreneurs are not always in a rush to go public. Will Her Majesty’s Government consider simplifying trading in private company shares, possibly even introducing electronic trading, so that founders and employees can access the liquidity they need?

[Lord Callanan (Con)]

My noble friend makes an interesting point. Although this White Paper does not include proposals on trading in companies’ shares, the listings review of the noble Lord, Lord Hill, does include some recommendations, including making it easier for private growth companies to make the jump to a public listing.

[The Lord Speaker (Lord Fowler)]

My Lords, all supplementary questions have been asked. That brings Question Time to an end.

Renewables Obligation (Amendment) Order 2021

Lord Callanan Excerpts

Tuesday 23rd March 2021 Lords Chamber

Moved by

[Lord Callanan]

That the draft Order laid before the House on 3 February be approved.

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

My Lords, this draft instrument relates to the renewables obligation renewable electricity support scheme. The renewables obligation was introduced in 2002 to provide a subsidy for electricity generation from renewable sources. It covers onshore and offshore wind, solar, hydro, biomass et cetera. The scheme is now closed to new applications, although support for existing stations continues. The scheme closes finally in 2037.

The scheme was part of a programme of measures aimed at stimulating the renewables industry to enable ambitious climate change targets to be met. Without subsidy, the nascent renewables sector would have struggled to make headway in a market dominated by the established heavyweights of coal, gas and nuclear. The renewables obligation had an initial target of 10% renewable electricity by 2010, but today around 30% of the electricity supplied in the UK is supported under the scheme.

Of course, the scheme needs to be paid for, and this falls upon electricity suppliers. They currently provide almost £6.5 billion of subsidy per year to renewable generators. These costs are then passed on to their customers via their bills, adding about £70 per year to the average domestic electricity bill. Costs will fall from 2027 as generators start reaching the end of their period of support and then exit the scheme.

The draft SI deals with a technical matter, which relates to supplier payment default. More specifically, it aims to prevent electricity suppliers being unduly exposed to the unpaid bills of competitors who fail to meet their obligations. The renewables obligation actually comprises three separate but interlinked schemes: the renewables obligation covering England and Wales, the renewables obligation Scotland, and the Northern Ireland renewables obligation. The Scottish and Northern Irish Governments are responsible for their own schemes. The UK Government cover the England and Wales scheme; the matter under debate today therefore applies only to England and Wales.

The renewables obligation is a traded scheme. It places an obligation on electricity suppliers to obtain a certain number of green renewables obligation certificates in proportion to the amount of electricity they supply to their customers. Certificates are issued to renewable generators, for free, by Ofgem in relation to the amount of renewable electricity they generate. Suppliers typically buy these certificates, providing generators with an income stream over and above electricity sales revenues. Certificates are usually in short supply, so suppliers may make a cash payment, called a “buy-out” payment, in lieu of each certificate. The buy-out price is about £50 per certificate for the current renewables obligation year, and about 10% of the scheme is met this way. At the end of the scheme year, the cash fund is recycled back to those suppliers who met their obligation with certificates. This gives certificates additional value over and above the original buy-out price.

In recent years, an increasing number of suppliers have defaulted on their obligations under the scheme. Payment default leaves a shortfall in the cash fund, meaning that recycle payments are lower than they would otherwise have been. This lowers the value of certificates, which ultimately impacts generators’ returns. The scheme therefore features a “mutualisation” mechanism, which offers protection against payment default. Under the mechanism, shortfalls in the cash fund are recovered from all other suppliers and recycled back to those suppliers who met their obligation with certificates. However, the mechanism is triggered only when the shortfall exceeds a £15.4 million threshold. Mutualisation has been triggered in each of the past three years. In total, £173 million has been mutualised across suppliers in England and Wales. Electricity suppliers and their customers are therefore unhappy about the situation.

In December 2020, the Government consulted on a proposal to amend the mutualisation threshold so that mutualisation would be less easily triggered. It was proposed that the £15.4 million threshold should be replaced with a new threshold, calculated annually as 1% of the cost of the scheme. This 1% is broadly equivalent to the arrangements that were in place when mutualisation was first introduced into the scheme in 2005. Since then, the threshold has been gradually eroded in relative terms; it is now equivalent to just 0.25% of the scheme costs. This means that mutualisation can now be more easily triggered. In other words, the risk associated with supplier payment default has become increasingly tilted away from generators and towards other suppliers.

Our proposal and draft SI seek to redress the balance of risk. In the first year, the threshold will rise to about £62 million. This will ensure that suppliers and their customers are not unduly exposed to the unmet renewables obligation bills of other suppliers. Generators will face an increased risk that unmet obligations will remain unrecovered. This will have a small impact on the value of certificates. However, the new level of risk is broadly equivalent to where it was originally in 2005. In this respect, the SI can be considered restorative.

This draft instrument makes minor technical changes to the Renewables Obligation Order 2015 so that a fixed £15.4 million threshold is replaced with a threshold calculated on an annual basis. As I said earlier, the new threshold is determined as 1% of the forecast scheme cost for the year ahead. It also places a new requirement on the scheme’s administrator—in this case, Ofgem—to calculate and publish the threshold ahead of each obligation year.

In conclusion, the emergence of payment default and cost mutualisation under the renewables obligation is of increasing concern to electricity suppliers. Through no fault of their own, electricity suppliers have become increasingly exposed to the unmet obligations of their competitors, whereas renewables generators have seen their returns increasingly protected. The draft instrument will restore the original balance of risk between generators and suppliers. It will make it harder for mutualisation to be triggered, so suppliers will be less likely to be exposed to the unmet obligations of other suppliers. This is, of course, good news for consumers; they should benefit because the likelihood of mutualisation costs being passed on to them will be lower.

These legislative changes need to be effective on 1 April to enable them to take effect in respect of the next renewables obligation year, which runs from April 2021 to March 2022. Consequently, and subject to the will of Parliament, this draft instrument will enter into force on 31 March 2021. With that, I commend this order to the House.

--- Later in debate ---

[Lord Callanan (Con)]

My Lords, I thank everyone who contributed to this short debate. I feel as though I should apologise to the House for what has turned out to be something of an ex-MEP fest in terms of the contributions made. I will try the patience of other Members a little longer because it is, of course, a particular personal pleasure to respond to this debate and welcome the excellent maiden speech of my good friend and former ex-colleague—now my colleague again —my noble friend Lord Kamall. I have known him for 16 years. We worked together in the European Parliament. I think the House knows from his excellent, well thought-through, intellectual and witty contribution —I particularly liked the remark about bus drivers—that we will have lots of further excellent speeches from him in the months and years to come, and can look forward to his contributions to our debates, delivered with his usual panache and good humour.

I was going to make a number of other points but, as usual, my noble friend Lord Hannan has stolen all my best lines. One thing that my noble friend Lord Kamall always did when we had the pleasure of serving together in the European Parliament was continue my education because, as a proud Muslim, he is a great exponent of the role that early Islam played in the development of free markets. He is passionate in his belief in and support of that. The other thing that I found particularly ironic and amusing in this House is that, as a proud Muslim, he made his maiden speech from the Benches normally occupied by the Church of England Bishops. He should continue with his challenging behaviour in the months and years to come but, in the meantime, I welcome him and thank him for his remarks. I am sure that the House will continue to benefit from his wisdom in future.

Moving on to the real subject of the debate, I welcome the support of those noble Lords who recognise that the draft SI will ensure that electricity suppliers—and, by association, their customers—are not unduly exposed to the unmet obligations of other suppliers. However, I want to address the concerns of the noble Lord, Lord Moynihan, and others—both in this House and elsewhere—about the impact of this draft SI on renewable electricity generators that are supported under the RO scheme.

The Government are conscious that, under the draft SI, an amount equivalent to 1% of scheme costs could remain unrecovered in the event of supplier payment default. In real terms, this represents an increase from the current £15.4 million to around £62 million in the first instance. On a per-certificate basis, this is equivalent to an increase from around 14p to 55p; bear in mind that, notionally, the value of a certificate is currently around £55.

There is therefore no avoiding the fact that generators will face an increase in the amount of recycle payments that are at risk in the event of supplier payment default. However, let me reiterate for the benefit of the House that the draft SI is restorative. By this, I mean that it restores arrangements that were introduced in 2005 and which have since become eroded to the detriment of suppliers. In this respect, what is proposed here is nothing new.

The Government remain committed to ensuring the RO runs smoothly and continues to provide renewable generators with the level of support they have come to reasonably expect. The Government are also mindful of the impact that mutualisation costs can have on electricity suppliers, whose margins are particularly squeezed, and are equally to committed to ensuring that both they and the customers continue to receive a fair deal. It is the Government’s view that this draft SI strikes a balance between these needs.

I am dealing with the individual queries raised by my noble friends Lord Moynihan and Lord Kirkhope, who asked about the impact on generators. As I said, there is a potential small impact on generator returns under the proposed new arrangement, as it increases the sum that might remain unrecovered in the event of supplier payment default. But we are of the view that the benefits for suppliers and their customers of proceeding with this SI outweigh the costs.

My noble friend Lord Moynihan also mentioned the views of Citizens Advice. Our intention is to consult further about the guarantee on liabilities. It is our intention to consult further in the next few months on measures that could be introduced to tackle the perceived underlying causes of mutualisation. This would consider both regulatory-based approaches, which would, for example, require suppliers to post guarantees of security, and legislative-based approaches, which would, for example, require more frequent settlement by suppliers.

My noble friend Lord Kirkhope asked whether Ofgem does an annual report. The answer is yes; it always has and always will. He also asked whether we were taking action too late—perish the thought. We took action in 2018, when it was clear this was not an isolated incident, and Ofgem has recently launched a licensing review.

My noble friend Lady McIntosh asked about suppliers exiting the retail market and what the SI does for consumers. It is a fact of life in the market that, from time to time, suppliers in a competitive retail market will fail, and when suppliers exit the market, for whatever reason, without paying their renewables obligation, a payment shortfall will occur, and this may result in mutualisation being triggered. The SI we are considering today does not address the causes of supplier failure and payment defaults. However, separate action is being taken to tackle those issues. As I mentioned, Ofgem’s supplier licensing review is seeking to minimise the likelihood and impact of disorderly supplier failure.

My noble friend Lady McIntosh also asked about the impact on consumers and business users. I reassure her that the SI is good news for consumers and business users alike, as it will lessen the likelihood of mutualisation occurring, which reduces the cost risks that suppliers are exposed to, and we expect that this will reflect in a small reduction in their electricity tariffs.

The noble Lord, Lord Grantchester, asked where the figures came from and whether the SI would prevent mutualisation. The sums at risk are percentages, some of which I quoted, of the cost of the scheme. There are of course no guarantees the new threshold will not be exceeded, but we think it is much less likely under the new provisions.

Finally, the noble Baroness, Lady Bowles, asked about the additional generator costs. Generators must absorb the additional costs should mutualisation be triggered. But we think it is less likely. The SI restores the arrangements that unintentionally have been eroded over the years, tilting the risk back towards the suppliers.

With that, I think I am done with most of the queries I was asked. Therefore, I commend this draft order to the House.

Motion agreed.

Heat Pumps

Lord Callanan Excerpts

Monday 22nd March 2021 Lords Chamber

[Lord Oates]

To ask Her Majesty’s Government what plans they have to work with local authorities to increase the uptake of heat pumps in domestic premises.

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

My Lords, the Government remain committed to the ambition set out in the Prime Minister’s 10-point plan to install 600,000 heat pumps every year until 2028 to make the UK’s homes warmer and more efficient. We already work closely with local authorities on heat-pump delivery, through schemes such as the local authority delivery scheme. The upcoming heat and buildings strategy will set out further details on how we plan to meet this ambition.

[Lord Oates (LD)]

I thank the Minister for his reply. Does he agree that local authorities are well placed to provide the direct engagement and advice required if consumers are to be persuaded to switch to heat pumps in sufficient numbers to meet the Government’s target? Therefore, will the forthcoming heat and buildings strategy introduce properly funded local-area-wide heat and energy efficiency plans to help drive the switch?

[Lord Callanan (Con)]

The noble Lord makes a very good point. I have worked closely with local authorities on many of these schemes. The heat and buildings strategy is a priority, and we are aiming to publish shortly after the conclusion of the local elections in England and, of course, the elections in Scotland and Wales. The strategy will set out the important role of local authorities in supporting heat decarbonisation, including raising awareness of the support available to increase voluntary uptake of low-carbon heating systems.

[Baroness Whitaker (Lab) [V]]

My Lords, one of the biggest problems in reducing carbon emissions is domestic gas heaters. What are the Government doing about finding a way to enable residents of blocks of flats to exchange their gas heaters for electric ones?

[Lord Callanan (Con)]

The noble Baroness draws attention to an important problem. Of course, given the diversity of heat demand, no one solution can provide the best option for everyone; we suspect that a mix of technologies and customer options will need to be available if we are to be able to decarbonise heat at scale, particularly in blocks of flats.

[Lord Mackenzie of Framwellgate (Non-Afl) [V]]

My Lords, with large numbers of young people and skilled older workers being thrown out of work as a result of the pandemic, is this not the ideal opportunity for the Government to level up by recruiting, retraining and skilling up a green workforce in places such as the north-east—which the noble Lord knows well—to carry out the required conversion work to heating systems in millions of homes and to ensure that green heating systems are installed in all newbuilds going forward, so that we meet our carbon-reduction targets?

[Lord Callanan (Con)]

It is indeed a good opportunity; I agree with the noble Lord. He will be aware that we recently announced a net-zero building package worth around £3 billion, and the Government are also working closely with industry to ensure that technical education provides new entrants with the skills that will be needed to install these new low-carbon heating systems.

[Lord Howell of Guildford (Con) [V]]

My Lords, I declare my interest, as in the register. While installing heat pumps in all newbuild homes makes a lot of sense, 23 million existing homes have gas heating that needs to be replaced as well. Estimates for doing this vary between £5,000 and £10,000 per household; I leave noble Lords to do the maths, but clearly we are talking about astronomic sums of money, even if it is spread out over the years ahead. Is this really the right resource priority in checking the fast rise in global emissions that is about to be resumed, thanks largely to Asian coal burning, when emissions should actually be falling and not rising at all? Should we not now be refocusing our strategic aims and resources more on the real-world climate dangers before us?

[Lord Callanan (Con)]

My noble friend will be aware that, if we are to meet what is now a legally binding net-zero target, practically all homes—both new and existing buildings—will need to be net zero by 2050. We expect the cost of heat pumps to fall in a mass-market scenario, and the action that we are taking will help to bring down these costs—but the noble Lord highlights an important problem.

[Baroness Thornhill (LD)]

From talking to my local authority colleagues, I know that their concern is that, for heat pumps to work effectively and actually reduce fuel bills, homes first need to be retrofitted to quite a high standard. However, it is commonly acknowledged that, as the Committee on Climate Change report last year stated, these policies are deemed to have failed, mainly due to the public’s reaction to them. Basically, they cost too much, and it is too much hassle. So does the Minister agree that getting the public on board with retrofitting is a crucial first step towards meeting net-zero targets and that local authorities are absolutely crucial to that task? We must take the public with us.

[Lord Callanan (Con)]

Indeed I do agree with the noble Baroness that we have to take the public and local authorities with us. As we will set out in the upcoming strategy, we acknowledge that there is further work to do to understand the many constraints that are facing us and how best we can work with both the public and local authorities.

[Lord Colgrain (Con)]

Is the Minister aware that, within the current calculations of energy performance certificates, air-source heat pumps are given a poor rating on the basis that electricity is seen as an expensive way to heat a property. With current requirements to have at least an EPC E rating for any domestic residence, rising to a suggested D rating by 2025, could the Minister confirm that EPC regulations will be reviewed to reflect energy efficiency rather than the cost of energy?

[Lord Callanan (Con)]

My noble friend well reflects my correspondence—I am receiving a lot of letters on this important issue at the moment. A call for evidence was issued in 2018 on how further to improve EPC accuracy and reliability and how these changes can be implemented. As my noble friend may be aware, the Government have published an EPC action plan detailing a series of actions that we can take to improve EPCs.

[Lord Cameron of Dillington (CB) [V]]

My Lords, is the Minister aware that if all our demand for heat as a nation goes electric, at peak heat requirement we will need five times the current peak electricity generating capacity, and that does not include any extra demand for electric cars and transport? What will the Government do to ensure that we have the correct and renewable generating capacity to cater for this revolution?

--- Later in debate ---

[Lord Callanan (Con)]

We already work closely with Ofgem and key electricity network stakeholders to assess the network impacts and the future requirements arising from the increased deployment that the noble Lord highlighted. The work is focused also on how these requirements can be met cost effectively and practically, and on the potential role of flexibility in switching demand away from peak times.

[Lord Grantchester (Lab) [V]]

My Lords, in the absence of a heat and building strategy, with only a scattergun, 10-point plan at the start of another financial year for local councils, what will the Government implement to co-ordinate local area energy planning into an effective patchwork of integrated solutions, starting with incremental core funding schemes?

[Lord Callanan (Con)]

The heat and building strategy will set how we will co-ordinate many of these plans and work with local authorities. As the noble Lord is aware, we have a number of incentive and funding schemes to help in this deployment.

[Baroness Sheehan (LD)]

My Lords, I refer to the undertaking given in the Minister’s letter of 25 January to a director of a company in the domestic heating decarbonisation sector promising that the green homes grant would support shared ground source heat pump installations in high-rise apartment blocks owned by social landlords. Up to last week, only one ground source heat pump had been supported by the GHG. When will this undertaking be implemented?

[Lord Callanan (Con)]

The GHG is facing some delivery challenges, as the noble Baroness will be aware. The deployment of heat pumps is proceeding. I can find out the latest figures for ground source heat pump deployment and let her have them in writing.

[Lord Birt (CB) [V]]

My Lords, decarbonising home heating, responsible for around one-fifth of our emissions, is an enormous challenge. There are a number of different technological approaches to meeting it, not just heat pumps, all with uncertain practicality and unsettled economics. The Government have published a road map and a timetable for the transition to electric vehicles. Will they produce an equivalent plan for home heating?

[Lord Callanan (Con)]

Yes is the short answer. As I mentioned earlier, we are developing options for how a long-term framework of policy approaches can set us on a path to decarbonising heat, homes and buildings. The heat and building strategy will set this out in more detail.

[The Earl of Caithness (Con)]

My Lords, is my noble friend rural-proofing the new strategy? He will be aware that a lot of houses in rural areas are off the mains gas grid and will need alternatives because heat pumps are so expensive. Is he considering bioenergy fuels and other alternatives?

[Lord Callanan (Con)]

Heat pumps are probably the best way of deploying electric heat in many rural areas, but we agree that it is a problem in rural areas that are not connected to the mains gas grid and often have shaky electricity supplies as well. This is a challenge that we are aware of, and we are meeting many representatives from the sector to work out how we can overcome these problems.

[The Senior Deputy Speaker (Lord McFall of Alcluith)]

My Lords, all supplementary questions have been asked. We now move to the next Question.

Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Lord Callanan Excerpts

Monday 22nd March 2021 Lords Chamber

Moved by

[Lord Callanan]

That the draft Regulations laid before the House on 11 February be approved.

Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 18 March.

Motion agreed.

Financial Reporting Council (Miscellaneous Provisions) Order 2021

Lord Callanan Excerpts

Monday 22nd March 2021 Lords Chamber

Moved by

[Lord Callanan]

That the draft Order laid before the House on 8 February be approved.

Considered in Grand Committee on 18 March.

Motion agreed.

Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021

Lord Callanan Excerpts

Monday 22nd March 2021 Lords Chamber

Moved by

[Lord Callanan]

That the draft Regulations laid before the House on 24 February be approved.

Relevant document: 48th Report from the Secondary Legislation Scrutiny Committee

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

My Lords, noble Lords may remember that the Corporate Insolvency and Governance Act 2020 revived a power to regulate connected sales in administration, which this statutory instrument uses. Now more than ever, we need a strong and robust insolvency regime to provide confidence to businesses, creditors and investors alike, particularly as we endeavour to rebuild the economy after the challenges it has suffered from the Covid-19 pandemic. The power enables us to strengthen the regime by imposing requirements where sales in administration are made to a connected person.

A pre-pack sale is where the sale of all or part of a company’s business is arranged prior to it entering administration. The sale is then completed by an insolvency practitioner appointed as an administrator. This usually occurs on the same day or immediately after the company enters administration. Pre-pack sales are a valuable part of the insolvency landscape, representing around a third of all administrations. They can be a useful tool to rescue businesses, save jobs and preserve value. However, creditors are often unaware of the sale until after it has been completed and this can cause concerns, particularly where the sale is to a connected person, such as a director or one of their family.

Previous criticism about whether pre-pack sales are always in the best interests of creditors led to a number of industry measures being introduced in 2015. The main aim of these measures was to increase the transparency of pre-pack sales. Key to this was the opportunity for a connected purchaser to seek an independent opinion from a new Pre Pack Pool, a group of experts able to provide an arm’s-length view on the reasonableness of the transaction. Additional measures included strengthening professional standards for pre-pack sales.

There has, however, been a very low uptake of the use of the Pre Pack Pool. Each year, since its introduction in 2015, no more than 22% of connected purchasers have sought independent scrutiny of the offer. A government review concluded that pre-pack sales remain a valuable tool for business rescue, but that industry measures had not gone far enough in restoring creditor confidence. Consequently, the Government announced in October last year that they would regulate to strengthen the legislative framework in this area, principally by requiring an independent scrutiny of pre-pack sales where the sale involves a connected person. Draft regulations were published in October 2020 to seek stakeholders’ views. I thank my noble friends Lord Hodgson of Astley Abbotts, Lady Altmann and Lady Neville-Rolfe, the noble Lords, Lord Vaux of Harrowden, Lord Mendelsohn and the noble Baroness, Lady Bowles of Berkhamsted, for their valuable contributions and useful discussions in developing the regulations further. The comments of noble Lords, along with those of other stakeholders, have been considered carefully and certain changes have been made to take account of the feedback received.

These regulations will mean that an administrator will be unable to make a substantial disposal of a company’s assets to a person connected with it without either the approval of creditors or an independent written opinion. The requirements will apply to a disposal made to a connected person during the first eight weeks of administration. The meaning of a “substantial disposal” is defined in the regulations and the meaning of “connected persons” is set out in primary legislation. To prevent the requirements being circumvented, the definition of a substantial disposal includes sales which are carried out through a number of transactions and/or where these are to different connected persons.

The definition covers not only what would ordinarily be considered pre-pack sales, but any disposal made to a connected person within the first eight weeks of administration. This is to prevent the requirements being circumvented. The independent report must be provided by an individual qualified to do so within the meaning of the regulations and that individual is referred to as an evaluator. The administrator must be satisfied that the evaluator has the relevant knowledge and experience to provide the report. Requirements are also imposed on the evaluator in respect of their independence.

Following comments from stakeholders, the regulations have been strengthened and now require an evaluator to hold professional indemnity insurance to carry out the role. In practice, the role of an evaluator is likely to be fulfilled by certain professionals such as accountants, surveyors, lawyers and insolvency practitioners, along with members of the current Pre Pack Pool who meet the requirements to be able to fulfil the role. Depending on the nature of the disposal, other individuals who meet the requirements may also be suitable to act as an evaluator. The report provided by the evaluator must include a statement that indicates whether or not they are satisfied that the sale is reasonable.

A key concern of stakeholders was the risk of shopping around for a favourable opinion since there is no limit on the number of reports a connected person can obtain. We believe that the circumstances where someone would do this will be limited due to the cost implications and likely delay to the sale. However, in response to these concerns, changes have been made to the regulations to ensure transparency where more than one report is obtained. The evaluator will be required to include within the report the details of all reports that the connected person has previously obtained. If the connected person refuses to disclose a previous report or the evaluator believes that they are seeking to conceal the existence of such a report, that must also be set out in the evaluator’s report. Once received, the administrator must consider the report, circulate it to all known creditors and file a copy at Companies House. If the evaluator’s report states that they are not satisfied that the sale is reasonable, an administrator can still proceed where they consider it is in the best interests of creditors. If that happens, they must provide a statement to creditors setting out their reasons for doing so.

In conclusion, this statutory instrument will provide greater scrutiny of sales where they are to a connected person and give assurance to creditors that such a sale is appropriate in the circumstances. I commend the draft regulations to the House.

--- Later in debate ---

[Lord Callanan (Con)]

I thank all noble Lords for their valuable contributions to this debate. Yet again the House has shown the great value of the experience in this area with some very valuable and well-thought-through contributions. I say to my noble friend Lord Hodgson that I had no say in the timings of the debate, but I know that the noble Baroness, Lady Bloomfield, has taken careful note of his comments and will reply to him directly about the timescales.

Pre-pack sales are of significant interest in our economy and this is reflected in many of the comments made today. They are a valuable rescue tool where a company in financial difficulties has underlying value and is potentially viable. This is particularly relevant in the current economic climate, with many businesses struggling with the impact of the pandemic. Having a range of rescue vehicles for viable businesses within the insolvency framework will aid the recovery of our economy.

The power under which these regulations are made would potentially have permitted regulations to be made banning pre-pack sales to connected persons completely. It was clear from the government review of the 2015 industry measures that stakeholders believe that the opportunity to pre-pack a business to a connected person should be preserved.

In some circumstances, the business only has value to those connected to the insolvent company and a pre-pack sale is the best way to preserve that value for the creditors. However, it was recognised that there needs to be a stronger regulatory framework to prevent the risk of abuse for creditors.



The Government consider that these regulations will provide the additional safeguard and transparency of independent scrutiny while still enabling the rescue of viable businesses through a pre-pack sale. Let me assure the noble Lord, Lord Mendelsohn, that, subject to parliamentary approval of this statutory instrument, the Government will monitor its implementation to see how the regulations operate in practice. We will also provide guidance to assist connected persons, evaluators and administrators to understand their responsibilities under these regulations. In addition, we are working with the industry to strengthen professional standards for pre-pack sales.

The legislative and non-legislative changes will be monitored together to see whether they meet the objective of improving transparency and creditors’ confidence. If there is evidence that problems persist or that new issues have arisen, the Government will consider whether further changes are needed, including whether pre-pack sales should be banned altogether. Likewise, if there is evidence that the regulations are impeding legitimate rescue attempts, we will consider whether further adjustments are needed. As the economy and businesses strive to recover from the impacts of Covid-19, it is important that we have flexibility within our insolvency and restructuring framework. This will allow companies in financial distress to find the right mechanism to best help their particular circumstances, while balancing the needs of those affected by the insolvency to ensure that they are treated fairly and have confidence in the process.

With the time I have remaining, let me deal with a number of the questions that were asked. The noble Lords, Lord Mendelsohn, the noble Baroness, Lady Bowles, and my noble friends Lord Hodgson and Lady Neville-Rolfe, all asked why we did not mandate opinions from Pre Pack Pool; indeed, many noble Lords have asked me about this separately. The reason this did not prove possible is that it is a private limited company, so there are wider legal implications—both under competition law and in the scope of the regulation-making power—for seeking to make a single private company a monopoly provider of authorisations to take certain steps under insolvency law.

The noble Lord, Lord Mendelsohn, asked why the regulations do not define what is meant by “substantial” and whether there will be guidance on this matter. Since what constitutes a substantial sale may be different in any given case, depending on the nature of the business, this has been left to the administrator’s judgment. “Substantial” is used elsewhere in insolvency legislation, so administrators are used to making this type of judgment in the normal course of their duties. However, examples will be provided in guidance as to what may constitute a substantial sale in a particular case to aid the administrator. Also, on using “significant” or “substantial” in the definition, “substantial” is used elsewhere in insolvency legislation, so insolvency practitioners are already familiar with the term. However, again, we will monitor the impact.

The noble Lord raised the issue of secured lenders. Some secured lenders will potentially be caught by the definition of “connected persons” where they are entitled to exercise more than one-third of the voting rights. As with all good provisions, we will of course keep this under review.

The noble Lord also asked why the regulations do not make the administrator responsible for obtaining a report at the connected party’s expense. As the vast majority of pre-pack sales are arranged prior to an administrator’s appointment, with the sale completed on day one, placing a requirement on the administrator to be responsible for obtaining the opinion would cause a delay to the sale, which would increase costs and potentially hinder the business rescue.

My noble friends Lady Neville-Rolfe and Lord Hodgson, and the noble Lord, Lord Mendelsohn, asked whether we intend to review these regulations when they are in force. As I said earlier, we intend to monitor the implementation of this SI and will consider modifying or supplementing its provisions in the future if it proves necessary to do so. We will work with the insolvency regulators, professional bodies and opinion providers that are implementing the regime to work out whether any changes are necessary.

A number of noble Lords—my noble friend Lady Neville-Rolfe and the noble Lords, Lord Vaux, Lord Foulkes and Lord Lennie—asked me about a list of approved providers or evaluators. The Government take the view that this would be an unnecessary administrative burden on government at a time when public resources and expenditure are under severe pressure. A person whose knowledge and experience are suitable in one context might be unsuitable in a different context. A list would not therefore remove the need to consider whether a person’s knowledge was sufficient on a case-by-case basis.

The qualification requirements for evaluators was raised by the noble Lords, Lord Vaux, Lord Foulkes and Lord Lennie. As I said earlier, the administrator will need to be satisfied that the evaluator has sufficient knowledge and experience to produce the report and meet the other requirements of the regulations. Guidance will be provided for administrators to help them meet those conditions. We recognised where there were stakeholder concerns about this issue and subsequently strengthened the regulations by including a requirement that the evaluator hold professional negligence insurance.

The noble Lord, Lord Vaux, asked about the requirement for further reports and a potential penalty. There would be difficulties in introducing new penalties via the regulations and we have aimed to take a proportionate approach. The noble Lord asked also why the restriction on providing previous professional advice is limited to 12 months. A three-year restriction might impact the number of available suitable individuals able to provide an opinion, so is too long a period. We consider that 12 months is appropriate.

The noble Lord, Lord Foulkes, the noble Baroness, Lady Bowles, and other noble Lords asked about timing. Assuming that Parliament approves these regulations, it will be possible to amend them post the prior primary power sunsetting, so, yes, we can come back to them in the future even if the original primary power has sunsetted.

The noble Lords, Lord Foulkes and Lord Lennie, asked why the regulations allow the administrator to proceed with a sale if the evaluator provides an unfavourable report. I dealt with this in my opening remarks. The regulations provide a specific role for the evaluator which is confined to the provision of the report and determination of whether the grounds and the consideration to be provided for the sale are reasonable. The administrator is an officer of the court and has a statutory duty to act in the best interests of creditors as a whole.

The issue of Scotland was raised, as usual, correctly and appropriately, by the noble Lord, Lord Foulkes —it allows me to make a comment also about the other devolved Administrations. All the devolved Administrations have been informed of the intention to regulate, and officials have kept closely in touch with devolved colleagues on the proposals. If these regulations are approved by Parliament, they will apply in England, Scotland and Wales. An equivalent power to regulate connected persons sales in administration for Northern Ireland was created by the Corporate Insolvency and Governance Act 2020.

The noble Lord, Lord Mann, raised Football Index and Exeter City Football Club. We recognise the serious concerns of Football Index customers about these developments and the worry that will have been caused. I understand that the Gambling Commission has been investigating this company for some time and has suspended the operator’s licence while it continues. The Secretary of State for Culture and the Minister for Media and Data have met the Gambling Commission twice in the past fortnight to discuss this issue and have requested and received urgent updates. The noble Lord will understand that I cannot comment on an ongoing investigation, beyond saying that we are closely monitoring the situation.

The noble Lord, Lord Lennie, asked about banning pre-pack sales. I dealt with that earlier; it is possible we might come back to this in future if it proves not to be working. The noble Lords, Lord Vaux and Lord Lennie, raised the issues of the evaluator being a regulated professional and of how creditors can be assured that the report has been produced by someone with suitable skills. The regulations require that the individual providing the report should have professional indemnity insurance cover, as I said earlier.

I think I am out of time; I apologise to noble Lords whose questions I have not answered. If necessary, I will come back to them in writing. In conclusion, I believe that, by strengthening the legislative framework for sales to connected persons in administration, these draft regulations meet the challenge set for us. I therefore commend them to the House.

Motion agreed.

Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Lord Callanan Excerpts

Thursday 18th March 2021 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee

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

My Lords, these regulations were laid before the House on 11 February. We have shared a long and difficult journey since restrictions were first needed in March 2020. As individuals, we have had to endure the very necessary but nonetheless difficult requirement to socially distance, with limits on where we can go, what we can do and who we can see. That, of course, has had an impact on businesses, with many having to close temporarily, and many more being able to trade only under very tight restrictions.

I am sure noble Lords all shared my sense of optimism when, on 22 February, the Prime Minister was able to set out the road map for the staged lifting of restrictions in England, with plans for Scotland and Wales being published by the devolved Administrations soon after. We can at last look forward to a return to normality in the months ahead. This would not have been possible without our wonderful NHS workers, both in their caring for sufferers from the virus and in their astonishing efficiency in the successful rollout of our unprecedented vaccination programme. Over the next few weeks, businesses that have been closed for many months will be able to reopen and trade, initially subject to certain limitations but, if all goes well, free of restrictions in parts of Great Britain from late June.

Noble Lords will recall that the Corporate Insolvency and Governance Act 2020 provided urgent support for businesses severely impacted by the effects of the pandemic. Temporary measures such as suspension of the use of statutory demands and restrictions on winding-up petitions, and the suspension of personal liability for wrongful trading, were put in place to allow viable businesses the best possible opportunity to survive.

New insolvency and business rescue procedures were also introduced, which will allow companies breathing space to decide on the best course of action in the face of financial distress, or to use a new formal restructuring process. As a contingency, and to enable the Government to rise to meet unexpected challenges and strains on the corporate insolvency regime as a result of the pandemic, the Act provided the Secretary of State with a general power to make temporary amendments or modifications to the effect of specified insolvency and governance legislation through regulations.

This power was needed because at that time we just did not know what the future would bring. We had hoped, of course, that the pandemic would have run its course by autumn last year, but, sadly, as we all know, that turned out not to be the case. The general power meant that the Government could act quickly to make the urgent changes needed to prevent unnecessary insolvencies, to allow the regulatory and administrative frameworks to deal with any impact of the pandemic on case numbers, and to mitigate the impact of the legislation on the duties of those with corporate responsibility.

As this was such a wide power, its use was restricted. It can be used only for the purposes I have just mentioned, and only where the temporary change was in response to the impact of the pandemic. The general power can be used only where the need is urgent, the provision being made is a proportionate response to the challenge being met, and exercising that power is the only way to achieve the desired outcome. In addition, the Secretary of State has a duty not only to assess the impact of using the power on those affected by any changes but to keep any regulations made using the power under review and to revoke them if they are no longer needed.

The legislation creating this general power also specified that it would sunset on 30 April 2021, although that date could be extended by further regulation. The original expiry date for the general power was set when we all hoped that the pandemic would be over and life would return to normal by the autumn. It would allow the power to be used while businesses were recovering and adapting to life after the virus.

While we were of course hoping to be free of restrictions in June, businesses have suffered the impacts of the virus for a year now, and we may need to be able to use the general power while the economy recovers. The unprecedented package of Government support which has been put in place has so far allowed as many otherwise viable businesses as possible to survive, saving jobs and livelihoods in the process. But there is of course no question of it being business as usual as soon as lockdown restrictions are fully lifted. Indeed, the Office for Budget Responsibility is not expecting the economy to have fully recovered until the middle of next year.

These regulations use a power in Section 24(3) of the Corporate Insolvency and Governance Act 2020 to extend the sunset date of the general power, and will mean that the Secretary of State will be able to use it for a further year. Extending the period during which we can use the general power will mean that we can continue to be able to act quickly should the need arise, to give the best opportunities to allow viable businesses to survive the pandemic, and, in the process, save jobs and livelihoods.

The general power could, in addition, be essential to any strategy that we need to deal with any extraordinary pressures on the administrative and regulatory regimes. I can reassure noble Lords that the Government’s ability to extend the life of the general power is not open-ended. In particular, any further extension of the power is limited by Section 24(4), which prohibits the power being exercised after 24 June 2022—that is to say, for two years, starting with the day after the Act conferring the general power was passed.

It is important to note that these regulations do not introduce a new power but rather extend an existing one which we think is still needed. The general power has been used once since its creation to revive the suspension of personal liability for wrongful trading when national restrictions were reintroduced late last year. That suspension has not been extended, due to the apparent improvement in trading conditions at the time of its expiry at the end of September.

There are no specific plans to use the power again at present, but this could of course quickly change, and it remains an essential part of our toolkit in dealing with the impact of the pandemic on business. I commend these draft regulations to the House.

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[Lord Callanan (Con)]

I thank all noble Lords for their interesting and valuable contributions to this debate. The Government’s road map for the staged lifting of restrictions is cause for great optimism, and we can look forward to many businesses, including shops, pubs, and restaurants, being able to reopen successfully in April. But we have to recognise that these businesses and many others have suffered from the impact of the pandemic for a year now, and in many cases could take time to return to full pre-Covid financial health. The Government are determined to do whatever they can to continue to support businesses throughout this period of economic recovery. For example, many business owners and employees will have welcomed the Chancellor’s statement in the Budget that the furlough scheme will be extended to September this year.

All the same, traders and company directors will be having to assess whether full recovery of their businesses in a post-Covid economy is possible, and government financial support, along with the temporary easements in the Corporate Insolvency and Governance Act, must at some point be brought to an end. Having a power to use regulations to make temporary amendments to corporate insolvency and governance legislation, or modifications to its effect, will mean that we can continue to act quickly to meet the challenges which arise as a result of these uncertain times.

This was illustrated when the power was used to revive the suspension of personal liability for wrongful trading. This was a Corporate Insolvency and Governance Act 2020 provision which had expired at the end of September last year when trading conditions for many businesses had improved. Other temporary easements in the Act had been extended, but given the importance of wrongful trading as a protection for creditors and a deterrent to trading when insolvency proceedings are inevitable, the suspension was allowed to expire.

Sadly, as noble Lords will recall, there was a surge in infection levels in late October leading to national restrictions being reintroduced across Great Britain and businesses once again being required to close their doors. As a result, many company directors were once more faced with great uncertainty about their companies’ futures. Using the power to revive the suspension of wrongful trading meant that directors of companies which would have been viable but for the impact of the pandemic were able to make decisions as to whether they should continue to trade based solely on their knowledge and experience, rather than under the threat of becoming liable to contribute to the company’s debts themselves should insolvency proceedings then follow. This meant that unnecessary insolvencies could be avoided and is an example of how the power could be used going forward to save jobs and livelihoods.

My noble friend Lady Neville-Rolfe asked why we need the power for a further year. Although we now have a road map for the lifting of restrictions, the impact on businesses will continue after return to what we would call normality. The OBR predicts that the economy is unlikely to return to pre-Covid levels before the middle of next year, so we need to keep the power on the statute book until then. My noble friend also asked how we might intend to use the power. I am afraid I must say to her that, at the moment, we just do not know. There are no plans to use the power at present, but it is a contingency and we need to be in a position where we can meet urgent challenges quickly. If the worst happens, as the noble Lord, Lord Sikka, indicated, we may need the power as part of our strategy to deal with any increases in insolvency case numbers.

We also need to keep the power because, although the Prime Minister has now announced a road map for a gradual reopening, the impact of restrictions on businesses is likely to be felt beyond the point that we would consider to be full normality. As I have said, the OBR is expecting the economy to return to pre-Covid levels by the middle of next year, but we do not know for certain what will happen in the meantime. However, we do know that many businesses are struggling and may need protection. If we were to extend for less than a year and, as likely, a further extension was needed, we would be back here debating the same question in just a few months because of the requirement for debate before the extension can occur.

My noble friend Lady Neville-Rolfe referred to the audit reform proposals. The White Paper published this morning is not, of course, the subject of today’s debate, but I can certainly tell her that we have carefully thought through the director accountability proposals that she referred to. They would cover only the biggest companies, with turnovers into the hundreds of millions, and employing hundreds, or even thousands, of people. I think most people would think it appropriate that we ask directors of such companies to take a little more responsibility for the accounts and financial information produced by their companies. As I said, this will not apply to small business, to SMEs or to entrepreneurs, so I think I can put my noble friend’s mind at rest.

The noble Lord, Lord Sikka, asked what was being done to prepare for the approaching cliff edge of potential insolvency cases when government support measures and temporary easements end. Official statistics published by the Insolvency Service show that case numbers are still low in comparison with the same period last year, and it seems inevitable that there will be an impact on insolvency case numbers. This is being closely considered, and extending the power for a further year will allow any temporary changes needed to be made quickly. I thank the noble Lord for reminding the Government of the importance of closely monitoring the operation of the insolvency practitioner regulation regime.

The noble Lord, Lord Lennie, asked whether the other measures introduced by the Corporate Insolvency and Governance Act would be extended. We are considering that question at the moment, and I hope that we will be in a position to make an announcement shortly. I thank the noble Lord for asking about the other temporary measures in the Act, and I can assure him that they too are under close consideration; any announcement will be made shortly.

I think I have addressed all the points raised in the debate, and I thank all noble Lords who have contributed. I commend these draft regulations to the Committee.

Motion agreed.

Financial Reporting Council (Miscellaneous Provisions) Order 2021

Lord Callanan Excerpts

Thursday 18th March 2021 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Financial Reporting Council (Miscellaneous Provisions) Order 2021.

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

My Lords, I beg to move that the Financial Reporting Council (Miscellaneous Provisions) Order 2021, which was laid before the House on 8 February 2021, be approved.

The Financial Reporting Council, or the FRC, as I shall refer to it, is an independent regulator. It is responsible for regulating auditors, accountants and actuaries, and setting the UK’s corporate governance and stewardship codes. Following corporate failures such as BHS and Carillion, the Government have been working to understand and address shortcomings within the UK audit environment, including the role that the FRC as the regulator plays. As a result, the Government commissioned Sir John Kingman to conduct an independent review of the FRC. This review was commissioned in April 2018 and reported on 18 December 2018.

The FRC review made over 80 recommendations; its central recommendation was for a new, stronger regulator. The review indicated that the new regulator needed to be more transparent than the FRC had historically been and should be held to the same standards as other public sector bodies—including full compliance with the Managing public money handbook. The review also recommended that the FRC be subject to the Freedom of Information Act and the Regulators’ Code. These findings were supported by the Government and welcomed by the Business, Energy and Industrial Strategy Committee in another place.

Since the FRC review reported, the regulator has undertaken significant steps to strengthen its capabilities. Under new leadership, it has also begun to build the additional capacity needed to deliver on the ambitious mandate set out by the review. The FRC has also worked to streamline its governance structures and expand its stakeholder engagement. This order builds on the FRC’s progress in taking the non-legislative steps needed to implement the review’s recommendations on its internal workings.

Today represents another important milestone for audit and corporate governance reform. I am pleased that today we have published the Government’s White Paper Restoring trust in audit and corporate governance. It sets out a comprehensive and ambitious vision for reform of the corporate landscape and outlines the Government’s detailed proposals for further reform of the regulator. The instrument’s legislative measures are a further step forward on the path to transforming the FRC into a new, strengthened regulator. They apply the Freedom of Information Act, the Regulators’ Code and the public sector equality duty to the FRC.

I turn first to the application of the Freedom of Information Act to the FRC. As identified by the FRC review, currently only some of the FRC’s statutory functions are subject to the Freedom of Information Act. Since December 2019, however, the FRC has voluntarily complied with the provisions of the Act across the range of its work. This measure designates the FRC as a public authority for the purposes of the Freedom of Information Act so that all of its public functions are covered by the Act.

The Freedom of Information Act provides a general right of access to the public for information held by public authorities, subject to the exemptions set out in the Act. Public authorities are also obliged under the Act to produce and maintain a publication scheme approved by the Information Commissioner. The FRC was consulted on the application of the Freedom of Information Act and it supported the application of the Act to its public functions. Since the FRC is a public body, it is reasonable and proportionate that this measure is taken to apply the Freedom of Information Act to its public functions. In doing so, it will help to underpin trust and confidence in the regulator.

I turn now to the Regulators’ Code measure. The FRC is already subject to the code in respect of some of its regulatory functions. This order will apply the Regulators’ Code to all of the FRC’s regulatory functions, except for those that it has delegated to the relevant professional bodies. The code aims to encourage proportionate and consistent regulatory activity; it also promotes trust, open dialogue and accountability between the regulator and those that it regulates. Application of the code by legislation will enable the FRC to be more accountable and bring it into line with other regulators who are subject to the code in this way. It will encourage greater transparency for regulatory delivery, allowing the FRC to target its resources better. This in turn will support the FRC’s delivery of high standards of audit, reporting and governance in the UK. The Government have worked closely with the FRC and the relevant professional bodies and have consulted them regarding this measure. All the parties consulted support the application of the Regulators’ Code to the FRC through secondary legislation.

I turn to the public sector equality duty measure, which will add the FRC to the list of public bodies that are formally subject to this duty. At present, the FRC is subject to the public sector equality duty only in respect to the exercise of its public functions. The measure expands this so that the FRC itself will be subject to the public sector equality duty in respect of all of its functions. Sir John Kingman’s review of the FRC recommended that the regulator should fully consider and assess equalities impacts in its work. This measure will support that recommendation.

Those subject to the equality duty must: eliminate unlawful discrimination, harassment and victimisation and other conduct prohibited by or under the Equality Act 2010; advance equality of opportunity between people who share a protected characteristic and those who do not; and foster good relations between people who share a protected characteristic and those who do not. The term “protected characteristic” refers to those characteristics covered by the equality duty and includes age, disability, pregnancy and maternity, race, religion or belief, sex and sexual orientation and gender reassignment. This order means that the FRC will need to consider the objectives of the public sector equality duty in its oversight of those it regulates. Additionally, as the FRC is the regulator that sets the UK Corporate Governance Code, it promotes diversity reporting to the UK’s largest companies. It would only be right that the FRC itself was subject to the public sector equality duty in full. This measure will ensure that equality is considered as an important aspect of the regulator’s day-to-day activities.

In March 2019, in their initial response to the FRC review, the Government committed to replace the FRC with a new independent statutory regulator with stronger powers. The new regulator, the audit, reporting and governance authority, will be a stronger regulator underpinned by legislation. It will have stronger enforcement powers and will be funded by a mandatory levy on the industry that it regulates. The White Paper published today sets out the Government’s proposals in more detail. The Government intend to bring forward the necessary primary legislation to create the new regulator when parliamentary time allows. But we want to press forward with measures such as those in this draft instrument. They do not need to and they should not wait. These measures will ensure that the FRC is more transparent and accountable to the public as well as to the businesses and professions it regulates. It will also bring the FRC into line with the requirements of similar public bodies. These measures are therefore a further step down the road to creating the new regulator.

I conclude by emphasising that I see the measures contained in this order as important since they will help to bring about greater transparency on the part of the FRC. I hope that noble Lords will support them and commend the draft order to the House.

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[Lord Callanan (Con)]

I thank noble Lords who have contributed to this debate. The points that we have been discussing highlight the need for the measures contained in this order and emphasise the beneficial impacts they will have on the Financial Reporting Council and those that it regulates.

Reliable audit and corporate reporting are critical to well-functioning markets, business investment and growth. A transparent and effective regulator has a vital role in assisting the UK economy to realise these benefits. These measures will help the regulator meet the goal of ensuring that the UK maintains and advances its status as a place of the highest standards in audit and corporate reporting. They are a crucial part of the Government’s commitment to acting on the findings of Sir John Kingman’s independent review.

The noble Lord, Lord Davies of Brixton, asked about the timing of the SI given that the FRC is on the way out, and wanted to understand what we might not be applying to the regulator. He also asked how the Government enforce the Regulators’ Code. Establishing the new regulator, ARGA, requires primary legislation, and the Government intend to introduce that when parliamentary time allows. We think it is right to ask the FRC to start now, as we mean the new regulator, ARGA, to go on in this vein.

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[Lord Callanan (Con)]

To resume, the FRC did not start out as a public body. Since its creation in the 1980s, it has slowly accumulated public functions to the point that it has more recently been classified as a public body. Certain statutory functions of the FRC are already subject to the FoI Act. As the FRC is now a regulator acting in the public interest, we think it is right to extend the FoI Act to cover all the FRC’s public functions.

The noble Lord, Lord Davies, and the noble Baroness, Lady Wheatcroft, asked whether the Government have a system for monitoring the work of all regulators. In monitoring these regulators, the FRC is required to report annually to the Secretary of State on its activities relating to the oversight of statutory auditors, and that report must in turn be laid before Parliament. We have proposed yet stronger arrangements in relation to ARGA.

I answered the question the noble Baroness, Lady Wheatcroft, asked about when we might realistically see legislation. The answer to that is, I am afraid, the standard one: when parliamentary time allows. Now that we have published the White Paper setting out our intentions for the new regulator, the Government will recruit a permanent chair of the FRC. We are making these changes as laying the foundation for the new regulator, not extending the FRC’s house.

The noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Lennie, also asked why we are still waiting for these changes. We are intending to legislate as soon as parliamentary time allow us, and ARGA will of course come into being thereafter. However, I cannot give any guarantees as to when it is likely that will be.

The noble Lord, Lord Sikka, raised a number of comments about the order. The FoI Act obliges public authorities to publish certain information about their activities, and entitles members of the public to request information from public authorities. As RSBs are independent professional bodies rather than regulators, we do not believe it would be proportionate to subject them to the Freedom of Information Act.

On the point about referring to accounting standards rather than auditing standards, the new UK endorsement board, not the FRC, will be the body to endorse and adopt international financial reporting standards in the UK. The FRC has exercised some oversight of the RSBs, hence this function should be subject to freedom of information. The Regulators’ Code will promote openness at the FRC. Access to the FRC’s board meetings is, of course, a matter for the FRC itself. Although the FRC has staff from companies and the industry, its chair is appointed by the Secretary of State.

In response to the noble Lord, Lord Lennie, who asked why we disagreed with the regulator taking over the running of a failing auditor, we think this would be a fairly major step and we are not totally convinced of its likely effectiveness.

The noble Lord, Lord Lennie, also raised the point that ARGA will be a company limited by guarantee. The creation of ARGA will be achieved by renaming and reconstituting the FRC, which is a company limited by guarantee at the moment, at the same time as making substantial changes to its functions. The Government will legislate to rename the existing body and make provision for its internal governance, as will be set out in its articles of association. We are clear that ARGA will be a regulator with teeth, backed by legislation. It will be funded by a mandatory levy on industry and given much stronger enforcement powers. The Government consider that this approach has the advantage of minimising the transitional costs which would be involved in setting up a new, statutory corporation.

The important measures in the order ensure that the FRC will be designated as a public authority in respect of its public functions for the purposes of the Freedom of Information Act; that all the FRC’s regulatory functions will be subject to the Regulators’ Code; and that the FRC is added to the list of public bodies which are explicitly subject to the public sector equality duty. As a result, its responsibility for adherence will be clear. Compliance on a statutory level with the Freedom of Information Act, the Regulators’ Code and the public sector equality duty will ensure that the FRC is made more transparent and accountable to those that it regulates. It will support the FRC’s effective operation and bring the regulatory requirement in line with similar public bodies. It will also further strengthen its regulated status as a public body.

Establishing the new regulator will, of course, require primary legislation. As I said, the Government will introduce this when parliamentary time allows. In the meantime, the FRC has made some progress on the recommendations from Sir John Kingman’s review and those proposals can be implemented without legislation, in parallel with this order. The FRC recognises the significant role that it has to play in paving the way for the new regulator. Building trust in the UK’s audit, accounting and corporate reporting regulator is an essential part of the Government’s programme of work to reform audit and corporate reporting. Our proposals, published today, set out how we will achieve this.

Meanwhile, applying the measures in the order now to the FRC builds on other progress, and it does so through statute. It shows that the Government are committed to putting in place the right degree of transparency and oversight for the work of an important regulator. I recommend this draft order to the Committee.

Motion agreed.