Economic Crime and Corporate Transparency

Debate between Lord Leigh of Hurley and Baroness Bowles of Berkhamsted

Committee stage
Thursday 27th April 2023 Grand Committee

[Lord Leigh of Hurley (Con)]

I find some of these amendments tricky, really. Clearly, we are all keen to prevent fraud but I frequently wear the hat of the SME company. I should make the further declaration that I am the director of a number of SMEs and an investor in many more—not many successful ones but, none the less, I put my money in and hope. I have read the Law Commission’s options paper and the briefing papers from the APPG on Anti-Corruption and Responsible Tax, and I have had the pleasure of innumerable discussions with the very persuasive Margaret Hodge and her extremely capable team. Congratulations to them; they have got the Government to move to the much-promised amendments from the other place, the debate on which I read carefully. Clearly, we all want to beef up failure to prevent and the amendments go a long way to doing that.

I broadly support the principle of excluding small companies and I shall explain a bit more about why. However, I agree that the terms here are a bit odd. Needless to say, I am a bit worried about a company with 250 employees turning over only £36 million—it is more bust than small. I suspect, however, that these are EU figures, translated from the euro; I do not how they were arrived at but they may need some polish. They are definitely more “M” than “S”, and thought might be given to restricting ourselves to “S” rather than “M”. Needless to say, one looks at one’s business to see whether one is within scope —and, of course, I was reminded that the problem is with the balance sheet qualification. Ordinarily, I never thought that it would apply but, as fellow members of the Institute of Chartered Accountants in England and Wales will recall, the recent brilliant accounting standards brought in require one to capitalise leases in the balance sheet, meaning that companies’ assets are, frankly, grossly inflated. This definition refers only to gross assets, not net assets, so you will capture many more companies than you thought you might if you stick to that definition. I urge another look at the actual definition, if this route is taken.

It is certainly possible for large companies to develop procedures and systems, but smaller ones are, frankly, stretched with other matters, such as, essentially, how to pay the next payroll and survive. It is not reasonable to expect many of them to stop working, sit down and have a cup of tea and dream up preventive procedures. Of course, business owners do not want to see fraud because, at the end of the day, they will be the main losers. However, I can see lawyers advising on the purchase of massive amounts of belts and braces, given the penalties, which could be a massive distraction from the incredibly challenging job of trying to run a business and make a profit, which is difficult enough. I suggest that we see how large companies cope with the Bill, what it means in practice, what “preventive measures” —the guidance is yet to come—actually means, and then give ourselves the power to bring in small companies if we feel it is appropriate at a later stage, once we see what happens in practice.

I also have some concerns about Amendment 101, on the senior manager responsibilities. Of course, I strongly support measures which are likely to reduce economic crime. However, I note that an assessment produced by the Law Commission on individual criminal liability concluded that

“in principle, directors etc, should not be personally criminally liable on the basis of neglect if the offence is one which requires proof of a particular mental state. Liability for directors on the basis of neglect should be restricted to offences of strict liability or negligence”.

We have some way to go to make me feel comfortable that those are right.

There are other outstanding issues concerning senior manager liability, specifically how this would be monitored and enforced. The legal obligations on senior managers at the moment affect the UK’s competitiveness, particularly when trying to recruit talent at senior levels. So I would be reticent to encourage the introduction of significant legislative change without a broad assessment, which I would welcome, of the likely impact. That means consulting with industry and an official impact assessment that considers international comparisons of the effect, particularly on recruiting senior staff. Therefore, I would welcome some more consultation and consideration of the consequences of this reform.

On the proposed changes to the “identification doctrine”, clearly, amending it is essential to tackle the most egregious intentional behaviour; I get that. Here, of course, it is easier to see that in a small company—the Victorian brothers example—the directors could be guilty of this behaviour and, in an overzealous environment of trying to score wins, they could be prosecuted first, quickly and more easily. However, where you have a company consisting of tens of thousands or even hundreds of thousands of people, can we be certain that the act of a few rogue managers or even one manager a long way down the reporting structure should rightly lead to the sort of punishments suggested in some of these amendments?

That does not sit easily with me, and again, I still want to be convinced that we are in sync with our major international competitors. Let us not forget that while FDI into the UK has historically been very high, it is not now. The UK stock market is out of fashion, and countries all around the world are seeking to attract our businesses to set up offshore. Any legislation we bring in has to be very mindful of that.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I think it falls to me to start the winding-up speeches, but noble Lords will be pleased to know that I will not try to repeat everything that everybody else has said. I declare my interest as a director of both a large company and small companies; I set up my own first business in 1981, so I have spent most of my life as a business owner.

In this group I support the amendments mainly led by the noble and learned Lord, Lord Garnier. I hate to break with the gentle congratulations that have been given to the Government for at least doing something, but having such a weak amendment could well be counterproductive. The Government could think that they have done something when, as has already been exposed by many colleagues, it does very little. It will exempt most companies and it probably will not touch where action is needed most.

Economic Crime and Corporate Transparency Bill

Debate between Lord Leigh of Hurley and Baroness Bowles of Berkhamsted

Committee stage
Monday 27th March 2023 Grand Committee

[Lord Leigh of Hurley (Con)]

When my noble friend the Minister replies to this debate, I wonder whether he would consider accepting the amendment in due course with a de minimis size qualification. This would be quite onerous for a large number of private companies, such as family businesses, where ownership changes quite regularly, and small businesses that have enough to do without worrying about perfectly innocent share transfers. For larger companies—public companies in particular—this may not be too onerous. I remind the House of my comments at Second Reading that the Quoted Companies Alliance had calculated that the average public company accounts now comprise 95,000 words—no one is keen to add any more words to that. I would certainly not wish to see this apply to private and SME businesses.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I support these amendments. I have listened to what the noble Lord, Lord Leigh, has said and will perhaps think about that. I should declare my interest as a director of the London Stock Exchange. At 5% ownership, there are significant things that can be done: if it is a public company, at 5% you can apply to the court to prevent it going private. That is a significant power, and we ought to know that it is applied properly. I guess the court would find out if you were not who you said you were; nevertheless, you might be masquerading as such and could still have influence—you could call general meetings and propose resolutions. These are all events that could have a significant effect on companies of all sizes. I tend to feel, therefore, that other shareholders need to know that things have been properly verified.

I have sympathy for the SME angle and will think about it further. However, just because you are small does not mean that you do not need to know some of these things, including who might have an exercisable right which you know has been verified. I would probably follow suit in the decision on persons with significant control: if you are going to exempt SMEs, they should be exempted for both; if they are going to be included, they should be included in both. I am still veering towards including them, simply because it is a substantial power. There are plenty of private SMEs in which people have significant sums invested, and I do not really see that they should be protected any less from not having full awareness of who really holds these powers to do things or of whether they are sheltering a nominee.

At the moment, my tendency is to support both of these amendments as they stand, with the caveat that I will go away and think a bit about whether this would be too onerous for SMEs. We have to remember, however, that the “M”s of SMEs can be quite big.

National Security and Investment Bill

Debate between Lord Leigh of Hurley and Baroness Bowles of Berkhamsted

Committee stage
Tuesday 9th March 2021 Grand Committee

[Lord Leigh of Hurley (Con)]

My Lords, I will speak to Amendment 17, which is in my name. I thank the noble Baroness, Lady Hayter, for her comments in respect of her amendment, which might actually be a better amendment than mine but none the less would achieve much the same thing. She probably does it in a more elegant way, but the purpose of my amendment is to understand the logic here and to persuade my noble friend the Minister that he should revert to 25% throughout.

The mandatory notification obligation in Clause 6(2)(b), which the noble Baroness, Lady Hayter, wants to delete, is triggered as a result of acquiring over 15% of shareholding or voting rights. In paragraph 52 and elsewhere, the White Paper specifies 25% but forecasts 15% for notifiable acquisitions. Accordingly, it is not, and is not intended to be, consistent with Clause 8, as the noble Baroness said, but that leads us into problems. Let us try to walk through this. It is complicated.

As I read it, Clause 6 is there so that the Secretary of State is given a mandatory notification for them to consider whether a trigger event has happened. Let us look at what a trigger event is, then. For that, we have to rely on Clause 8 to see under what definitions a people has gained control. Clause 8 lists four situations, three of which are where the shareholding is 25% or more. That is fine, but that clearly does not apply in a 15% situation. So you have to rely on the fourth situation, which is set out in Clause 8(8), which bites because it is the scenario where there is the ability, alone or with others,

“materially to influence the policy of the entity.”

Therefore, if an investor goes from, say, 14% to 20%, a lot of work has to be undertaken to see whether that person can materially influence the policy. If the threshold was 25%, there would be no need to do this. So given that it is most unlikely that a sub-25% shareholder can materially alter the policy—more importantly, this will be hard to determine in practice, as the noble Baroness, Lady Hayter, said—are we not creating an unnecessary problem for ourselves? What does “materially influence the policy” mean anyway? Which policy? All policies? Dividend policy? Maybe. Hiring and firing policy? Most unlikely. Again, this will lead to consternation and commercial agreements on shareholders’ rights having to be implemented, which will be hard to negotiate because, when you enter this sort of area, there will be uncertainty over whether you can materially alter policy.

In my plea for certainty and clarity, can we make it 25% throughout? The risk of a 15% shareholder throwing their weight around to demand that action be taken to change a policy that would be against our national interest is somewhat remote. I suggest that, with a 15% threshold, there will be significantly more cases to consider, the overwhelming majority of which will not have national security implications. The current filing threshold of 15% is significantly below the thresholds used in a number of other major foreign direct investment regimes. France’s is 25%, which the amendment proposes, and Canada’s is 33.3%. I note that my noble friend Lord Vaizey is not due to speak on this group, unfortunately, but if he did I am sure that he would continue to encourage the Minister to look to Canada rather than France, which is perhaps a natural progression.

I am aware that some countries have a 15% threshold, but they are not jurisdictions seen as international business headquarters or centres of international business in the same way as we are, and we have to remember that there is a difference. Considering the volume of transactions, it will even, I suggest, lead to transactions that pose a national risk being overlooked because of the volume generated by this very low, 15% threshold.

While we are on this clause, can the Minister help me with Clause 6(3), which is relevant to the clause we are debating? It states:

“But a notifiable acquisition does not take place if complying with the requirement to give a mandatory notice under section 14(1) in relation to the gaining of control, or the acquisition of the right or interest, would be impossible for the person within subsection (2).”


What does “would be impossible” mean? I have asked around, and no one I have asked can be sure. Is this when a public company’s shareholder trips over 15%? What does “complying … would be impossible” mean? Could we all argue that it is impossible, give all sorts of reasons unspecified and that is the end of it? If much, much better brains than mine cannot understand the clause, it must need amending. I cannot amend it because I do not know what it is trying to achieve, but it cannot be good law to have clauses which are not immediately intelligible to, if not the layman, then the reasonably well-informed reader.

The whole of Clause 6 is difficult. It talks about regulations we have not seen and then gives power for those regulations to be amended at will under subsection (5). I think subsection (5) is where a white list is introduced in the regulations, but it, and subsection (6) allow carte blanche and, accordingly, more uncertainty. Can the Minister commit to look at Clause 6 again, specifically with the amendment I have tabled and with the amendment that he can see I will perhaps have to table on Report? Amendment 94, tabled by the noble Lord, Lord Fox, which we discussed the other day, would have helped. Can the Minister give some assurances that parliamentary scrutiny will be given to these regulations?

Amendment 17 looks to strike a more proportionate balance between protecting national security and reducing unnecessary burdens on investors. We want to be seen as an investment-friendly country.

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

My Lords, I thank noble Lords for introducing their amendments and exploring the reasoning behind them, which I have found helpful. I put my name down to speak to Amendment 17, which was signed by my noble friend Lord Clement-Jones, for whom I am broadly substituting because he is regrettably unavailable until later today. Like the noble Baroness, Lady Hayter, I was wondering why the Government chose 15% as the threshold above which a notification would become mandatory.

On the previous group, I wondered whether we could have different thresholds for different reasons. That would not be without precedent. For example, Australia has different percentage thresholds for lesser and more sensitive assets and different business value thresholds depending on the country of the acquirer. However, here we have 15%, which might be a number above which you fear an activist shareholder, but why?

In the UK, shareholders get some additional rights at 5%: they can go to court to prevent the conversion of a public company to a private company; they can call a general meeting; they can require the circulation of a written resolution to shareholders in a private company; or they can require the passing of a resolution at an annual general meeting of a public company. At 10%, you can call a poll vote on a resolution. At more than 10%, in a private company, you can prevent a meeting being held at short notice. At 15%, you can apply to the court to cancel a variation of class rights, provided that the shareholders have not consented to or voted in favour of the variation. Getting to 25% is significant, because it gives the right to prevent the passing of a special resolution, which could affect various articles and other things. I cannot see that preventing a change in class rights, assuming that a court would agree, is significant. I am slightly bemused about where that 15% number was plucked from.

We get to the point about whether fear of an activist shareholder is what this is all about. We hear of the insistence on having a director, when there is a certain quantity of shares, but they have to be able to control all the other directors, which does not always happen. It brings to the fore a thought about who owns the other shares, which would have to be taken into account in any assessments. Conditions might then be put on a company in respect of what happens to other shareholders to allow a transaction to pass.

As the noble Lord, Lord Leigh, explained, this makes something more complicated for reasons that do not yet seem clear. There are surely other inherent safeguards that would do the job. From that point of view, I support Amendment 17 signed by my noble friend but, as has been explained, there are other ways in which it could be achieved.

Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019

Debate between Lord Leigh of Hurley and Baroness Bowles of Berkhamsted

Monday 18th February 2019 Lords Chamber

[Lord Leigh of Hurley (Con)]

My Lords, I welcome this statutory instrument. I note that paragraph 77 of the consolidated impact assessment states:

“This does not remove the general need to review and improve legislation, which HM Treasury remains committed to doing in due course and where appropriate”.


Following the debates we had on the Financial Services (Implementation of Legislation) Bill, there are areas which might improve the financial services community and be for the benefit of the public and companies seeking to raise capital without the confines of some EU regulations; in particular, for small companies and for existing public companies that are seeking to raise capital from existing shareholders. At the moment, due to the expensive costs of a prospectus, they are prohibited from so doing. Although I have never prepared an impact assessment, I cannot imagine how one can be prepared in this sector, because there are so many potential benefits that might arise from this. I refer your Lordships’ House to my registered interests.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I too declare my interest in the register with regard to the London Stock Exchange.

I will make a couple of points on specifics, but before that I will say that I agree with noble Lords who have spoken about the manner in which things have had to be done and are done, rather than possibly what is done. By and large, the Treasury has performed well in fixing what it has to fix, but it has fallen down, possibly through lack of time, sometimes on Explanatory Memoranda and definitely on impact assessments. One of the things is that the public hardly seem to appear in the commentary. When the Minister introduced this statutory instrument, he said that equivalence was beneficial—it is in several ways—because for one thing it aided competition. He then said that that was to the benefit of consumers. That was about the only reference to consumers.

If prudential requirements are lower, does that benefit the consumer? It surely does in one sense: if the costs to businesses are less, perhaps the services to the consumer are less, but what does that do for stability? There are lots of questions about that, and the whole scene is not set. If I may say so, I may be the only person who was in the room when every one of these equivalence provisions was put in place, so I know why they are different, but it is still very difficult on some of the other SIs that we are dealing with even for me to work out exactly what is going on.

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Lord Leigh of Hurley and Baroness Bowles of Berkhamsted

Report stage (Hansard): House of Lords
Tuesday 29th January 2019 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for a good set of amendments that respond across the piece to concerns that were raised in Committee. I shall probe a little further on what can and cannot be done for the purpose of clarification.

Clause 1(1) states that this is about converting,

“the provisions, or any of the provisions, of any specified EU financial services legislation”.

So the option is still there not to convert it or to convert only parts of it. At an earlier stage, I suggested that that could be adapted. I noticed that when the Minister spoke, he used the word “files” as if the files were all transposed at once, but we must recognise that some things may not be transposed. I believe that is the intention. Here, I should give my usual reminder to the House of my interests as set out in the register, in particular as a director of the London Stock Exchange. In the first set of EU legislation—that which is completed but not yet active—you could still omit some or all of it and do an EU-type adaptation, but you could not adapt it if you chose to convert it. It has got to be relatively straightforward.

For the not yet completed, there is greater flexibility. I have a few little tests of my own to see whether this would be allowed. First, what if you wanted to keep a current provision instead of having a new one? That is quite simple: you probably just leave it out and do not convert it, which falls within what is allowed. If you want to reflect more closely an international standard—let us say that the EU has embellished it in some way—could you do that? I think you probably could because you are still going back to the originating international standard, but it would be interesting to hear what the Minister has to say about that. What if you want to reflect more closely UK market data because it has been calibrated on EU data, by then absent us? I expect most of that happens in technical standards, but it would be interesting to have the Minister’s view on whether the Government could make such a change. I think it would be allowable.

What about aligning with alternative provisions made in other major international markets? That would be departing from alignment with the EU into alignment with somewhere else. Let us say that you wanted to align tick sizes with Hong Kong or the US, rather than staying with the EU regime. Would that be allowed? I think that is quite a marginal issue. The Minister does not have to use that particular example, but it would be interesting to know where that would lie in the tests. If you want to avoid disrupting the functioning of UK markets—the sort of comment you often hear—you are probably left with the option of not converting that element.

My final test is, what happens about proportionality for SMEs and SME markets? I am not sure how that would work out: if the legislation has not included proportionality, is it reasonable and within scope to put some proportionality in? That measure is probably relatively popular from a UK perspective, so it would be nice to know whether that could be covered.

[Lord Leigh of Hurley (Con)]

My Lords, I too refer to my declaration of interest in the Members’ register, which has not changed since I last spoke. Despite my interest, I confess that I had some difficulty understanding all of subsection (1A)(b) of the proposed new section. The noble Lord, Lord Sharkey, read out the easy bit. The difficult bit is the words,

“but does not include changes that result in provision whose effect is different in a major way from that of the legislation”.

I think I understand the intent, but I am not sure that the words are exactly as another draftsman might have chosen to put it.

I am today looking for an assurance from the Minister that the adjustments he proposes will allow the Government the flexibility needed: in particular, if there is a restriction on changes that might be significant or major, that these will not bite where change really is needed if we leave the EU with no deal. As the noble Lord, Lord Davies of Oldham, has said, this legislation will come into play only if we have left without a deal—which nobody in this House seeks as a primary option—and in those unfortunate circumstances, we might need to be as flexible as possible.

By way of example, in respect of article 2(e) of the prospectus regulation, the alleviations granted by the EU were a compromise designed to suit all member states’ markets, all of which are very much smaller than the UK’s. The Government should adjust these to make them proportionate to the scale of the relevant UK markets. For example, the threshold below which public offers—an area I am particularly interested in—are exempt from the requirement to publish a prospectus, which is a huge cost, has been set at €8 million. By the way, initially it was agreed to be €2 million, then it went up to €5 million without any issues and then it became €8 million. For the UK market alone, a more appropriate level might be, say, £20 million.

The noble Baroness, Lady Bowles, referred to the definition of SME growth markets, which is a very important term. The definition was of course a compromise designed to suit all member states’ markets, and to avoid in some instances classifying members’ entire national stock market as an SME growth market, which would be a bit unfortunate. Perhaps the Government want to adjust this to make it proportionate to the scale of the relevant UK markets, possibly increasing the maximum market capitalisation from €200 million to £500 million.

Outside of article 2(e), I have mentioned at earlier stages of the Bill some issues relating to CSDR settlement discipline which are perhaps inappropriate and, in some cases, highly damaging to the unique, quote-driven liquidity provision of the UK’s SME market. I hope that I have satisfied the noble Baroness, Lady Kramer, that short selling in those markets is not damaging or dangerous to the UK economy. This would not apply to EU-based dealers, thus putting UK market makers at a competitive disadvantage because it would apply to them.

I hope the Minister can assure me that the Government will retain the power to have the flexibility needed to allow the UK to set its own rules for our financial services market, which is very different from the EU’s. I appreciate that this provision applies only in respect of in-flight rules but it sets the tone, and hereon in we will want to create our own bespoke laws, which may well diverge from the EU’s but will be more appropriate for our market. Rather than just hanging around hoping for some small alleviations in the circumstances of a no-deal Brexit, we really will need to act in a way that suits us in these areas.