Water (Special Measures) Bill [HL]

Lord Roborough Excerpts

Committee stage
Monday 28th October 2024 Lords Chamber

[Baroness Pinnock (LD)]

My Lords, I will address my comments to the amendment in the name of the noble Lord, Lord Cromwell. I agree with him that financial restructuring of companies has led us to where we are now, with Thames Water potentially on the brink of collapse—who knows who is going to have to fund the huge injection of capital that has apparently now been agreed. Other water companies are heavily indebted. Ofwat, which is after all the economic regulator, did not query, question or challenge those decisions made in the early years of water company privatisation.

The consequence is that anything the Government now attempt to do is basically closing the stable door after the horse has bolted—and raced to the other side of the world—because the companies are where they are. Although I agree with the noble Lord, Lord Cromwell, that any future restructuring ought to be put under the microscope of the economic regulator, the current situation is leading us to a potentially very grave position, which the Government are trying to address with the other financial clauses in the Bill. I read the clause referenced by the noble Lord, Lord Remnant, as being directed pointedly at a particular water company.

I support the amendment moved by the noble Lord, Lord Cromwell. I suppose it is better to change the situation now than leave it as it is, but what has happened already is unfortunate.

[Lord Roborough (Con)]

My Lords, Amendment 92 is very simple. Had it been in place when the water companies were privatised, it would have prevented the aggressive financial engineering that has led to the financial distress we see regularly reported in the press, which has provoked much anger in this House and elsewhere over the years.

Before I address Amendment 92, I will briefly comment on Amendment 10 moved by the noble Lord, Lord Cromwell. It coexists neatly with my amendment, allowing regulators to be better informed on issues with the financial structures of the companies they regulate, and to be aware of future problems. I am pleased that the noble Lord has moved this amendment, and I broadly agree that the regulator should have better information about the financial structuring of water companies in the interests of protecting their viability and preventing circumstances in which they become overleveraged.

I will speak to the dangers of overleveraging and the problems we have as a result of the weakness of the regulator, but we on this side of the Committee are interested in the amendment moved by the noble Lord, Lord Cromwell, which takes a fairly moderate step towards having a better-informed regulator. That said, it may be possible to go further, either by reforming the way the regulator works in the water sector or, as I propose in Amendment 92, by implementing statutory rules on borrowing for water companies and taking effective steps to prevent capital being taken out of companies that are overleveraged. We need to make the water sector attractive to investors so that they bring more capital into it to fund investment in cleaner and better water infrastructure.

I add my whole-hearted support to the amendment proposed by my noble friend Lord Remnant. It seems grossly unfair that a company that has behaved responsibly should be penalised by the actions of another in the sector. I am aware of precedent in the financial services sector, but that is to protect the integrity of the financial system, which is in all participants’ interests. In this case, each water company is a unique entity whose actions have little or no impact on others. Without this amendment, one bad actor could contaminate the industry.

I add my concerns about the wording that my noble friend Lord Remnant seeks to remove from the Bill. This new subsection as drafted applies the duty to render “relevant financial assistance” to any other company that holds, or held, an appointment under this chapter. This seems to me yet another example of retroactive effects that are littered throughout the Bill and which we will discuss in later groups. Could the Minister explain to the Committee what the Government’s intention is with this retroactive element in the Bill? Will there be a maximum period of time since the relevant company held an appointment for this duty to apply to it? This seems to us to be a concerning power, and we would seek clarifications from the Minister on both the unfairness at the core of this subsection and its retroactive element. I thank my noble friend Lord Remnant for introducing his amendment, and hope that he continues to make progress on this unfairness which exists in the Bill as drafted.

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Moved by

[Lord Roborough]

14: Clause 1, page 2, leave out lines 17 to 19
Member’s explanatory statement
This amendment prevents the new rules from overriding existing employment contracts.

[Lord Roborough (Con)]

My Lords, in moving Amendment 14, I will speak also to my Amendment 15.

As I mentioned in an earlier debate this evening, there are a number of areas in this Bill where its effects are retroactive on existing agreements, but the Bill fails to set out the exact limits of these powers. On these Benches, we have been clear at every stage in the passage of the Bill that we want to see tougher measures to hold water companies to account and to ensure that we have better outcomes for consumers and our environment. However, it would not be right for us to approve this Bill because it has a worthy goal, without scrutinising those areas where it is deficient. We have already spoken about Ofwat’s failures, and noble Lords across the Committee will surely admit that there are improvements to be made to the way that Ofwat itself works. Giving unclear levels of retroactive powers to the regulator is not something that should be accepted by Parliament, and we will scrutinise the Bill very closely on its retroactive impacts.

My Amendment 14 seeks to remove the lines from Clause 1 that seek to empower Ofwat to void existing agreements, including employment contracts. The Bill gives Ofwat the power to issue these rules without proper scrutiny, and in this part of the Bill we see how powerful those rules can be. Retroactively overriding employment contracts may be necessary for the Government’s objective to implement a blanket set of rules on remuneration for senior officers of water companies, but it is surely not an acceptable way to go about regulating the sector. I ask the Minister: what message does it send to a talented person working in the water sector today, as they build their career, to see measures such as this retroactively changing the rules of the game? We on these Benches fear that many talented people may choose to pursue a career outside the sector, for fear that the Government may yet again move the goalposts retrospectively.

I have intentionally tabled my related Amendment 15 separately, to probe whether the Government are willing to move at all on the retroactive impacts of the Bill. Amendment 15 seeks to remove the part of Clause 1 that enables the retroactive deprivation of performance-related pay under the rules. It is surely not right to implement rules now that have effect from the beginning of the year. Our concern is that the lines in the Bill that we seek to remove allow the Government to renegotiate unilaterally an employment contract that has been freely entered into between a third-party employer and a third-party employee. While it is customary that employment legislation often does just such a thing, there is very limited precedent for picking on one class of employees in one particular sector.

This is a very unfortunate precedent to set, which opens the door to a Government inserting themselves into employment contracts across other sectors to achieve the outcomes they want. That smacks of overreach. Should we seek to remove performance-related pay from software company managers if their software crashes; from insurance industry executives if we do not like their handling of claims; or from airline executives if their flights are late? I am sure that there may be some noble Lords across the Chamber nodding their heads that the Government should be doing just that; however, that is completely against the Government’s claims of being business-friendly. No competent executive would ever want to work for a UK-based company were these kinds of rules to be brought in.

Our amendment does not suggest a better alternative but simply suggests that the current method is unacceptable, and that the employed and the employer also need to be cognisant of the law and agree that these contracts be amended or replaced with agreement to reflect the intent of the Bill.

There is also the issue, which my noble friend Lord Remnant may address in greater detail in his comments, of interference in multiyear contracts, where portions of that payment may already have been earned and yet could potentially be prohibited under the Bill. I draw the Committee’s attention to the Explanatory Notes provided to the House by the Department for Environment, Food and Rural Affairs. Paragraph 79, under “Compatibility with the European Convention on Human Rights”, says:

“Provision relating to remuneration of water company executives is also not considered to result in ‘deprivation’ within the meaning of Article 1 of Protocol 1 to the Convention, as the provision relates to future income. Such income will only constitute a possession once it has been earned”.


I suggest that income in prior years in multiyear contracts has already been earned, just not yet paid. Therefore, I question the Minister on how compliance with the ECHR can be guaranteed in this case.

My amendments are, by their nature, probing. Given that they address an election manifesto commitment, they are designed to produce convincing answers from the Government on how these issues can be addressed. I look forward to the Minister’s reply. I beg to move.

[Lord Remnant (Con)]

My Lords, I am delighted that Amendment 26 in my name falls into the same grouping as those in the name of my noble friends Lord Roborough and Lord Blencathra. Although I very much regret that your Lordships’ time is having to be spent on potentially amending proposed legislation that has retrospective effect, it gives me the opportunity very much to support the arguments advanced by my noble friend Lord Roborough in support of Amendments 14 and 15.

It cannot be right retrospectively to override contract law with respect to employment contracts freely entered into by company and individual in line with relevant legislation and regulations in force at the time. Similarly, to the extent that, today, pay can be recovered from senior individuals under malus and clawback provisions in listed companies’ remuneration policies, such a draconian power can rightly be exercised only in extremely limited circumstances known in advance by the individual. The proposed exercise of the pay prohibition in the Bill retroactively goes way beyond accepted remuneration practice, and unacceptably so.

On my own amendment, I will not repeat the general arguments made by my noble friend against the principle of retroactive or retrospective legislation. I am no lawyer, so I hope that your Lordships will forgive me if I perhaps erroneously use the terms interchangeably. The offending principle, though, remains the same. The general rule in this country, and indeed in most modern legal systems, is that legislative changes apply prospectively. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow’s backward adjustment of it.

The Bill proposes that the provisions about performance-related pay apply from the financial year beginning 1 April 2024. We are currently some seven months into that financial year, and the Bill will not be enacted for some months hence. In effect we are talking about backdating the provisions for the best part of a year. The remuneration arrangements entered into between senior individuals and their employer will have been agreed under remuneration policies agreed by shareholders well before April for them to take effect from 1 April 2024. It surely cannot be right, whatever the merits of the Bill, for its provisions subsequently to alter those arrangements and the remuneration paid, or to be paid, under them.

Few things concern investors more than retrospective legislation, and listed companies will need to consult with and seek approval from shareholders on changes to remuneration policies at their AGM. Requiring retrospective changes risks companies breaching shareholder-approved remuneration policies. More fundamentally, it will undermine investor confidence at a time when they are being asked to fund a record investment programme.

My amendment would simply change the date from which the performance-related pay provisions come into effect from a historic 1 April 2024 to a mildly prospective 1 April 2025. Is that really too much to ask, to avoid breaching a fundamental legal principle? I do not think so and I hope that the Minister will agree with me.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank all noble Lords who have stuck with us this evening and carried on the debate. We know that the public have been clear that they want to see change and that where performance is poor, executives should not receive large salaries or bonuses.

I will start with Amendments 14 and 15, tabled by the noble Lord, Lord Roborough. The conditions of existing employment contracts may not align with Ofwat’s new rules. Our concern is that Amendment 14 may prevent Ofwat being able to apply its rules even when performance has not met the required standards. On Amendment 15, it is also right that where companies breach Ofwat’s rules on performance-related pay, Ofwat should be able, if it considers it appropriate, to require the company to recover any payment made in breach of the rules. Linking pay to performance should incentivise decision-making, resulting in improved outcomes for customers in the environment. I reiterate what I said earlier: should companies meet their performance expectations, executives can still be rewarded. So I hope that the noble Lord will understand why we will not accept his amendments.

I turn to Amendment 26, tabled by the noble Lord, Lord Remnant. This legislation will ensure that Ofwat is able to implement rules on performance-related pay in the current financial year. However, I listened really carefully to the speech that the noble Lord just made introducing his amendment. I would really like to understand his concerns better, so I wonder whether he would welcome further discussion on this matter so that we can look at it in more detail. I would very much appreciate it if the noble Lord was prepared to do that. But currently we are not going to accept the amendments as we feel that they would prevent meaningful implementation of the rules.

[Lord Roborough (Con)]

My Lords, I am grateful for the Minister’s reply. We respect that this is an election manifesto commitment and therefore needs to be in the Bill in some form, but my noble friend Lord Remnant and I would both like to discuss further with the Minister, if possible, how we can help to improve this part of the Bill. In the meantime, I beg leave to withdraw my amendment.

Amendment 14 withdrawn.

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Moved by

[Lord Roborough]

19: Clause 1, page 2, line 39, at end insert—
“(5A) Rules made for the purposes of determining standards of fitness and propriety mentioned in subsection (2)(b) must include criteria that help the undertaker to assess—(a) whether persons have the knowledge, skills and experience to perform the specific role that they are intended to perform;(b) whether, in assessing a candidate for a position within the management body of the undertaker, the management body as a collective possesses adequate knowledge, skills and experience to understand the undertaker’s activities;(c) how relevant and important any matters which suggest a person might not be fit and proper are;(d) whether appointed persons on temporary absence continue to meet the standards of fitness and propriety.(5B) The criteria in subsection (5A) are to be treated as guidance and may be applied in general terms when the undertaker is determining a person’s fitness and propriety.”

[Lord Roborough (Con)]

My Lords, I will attempt to be brief, in view of the hour.

Amendment 19 provides a clear definition of the criteria that will be used in determining whether someone is fit and proper to hold a responsible role in the water industry. As currently drafted, there is no definition and, as such, it is likely that everyone consulted would have their own different definition of what “fit and proper” might look like. There is precedent in another industry for such a test, which was undoubtedly in the back of the drafter of the Bill’s mind, in the financial services industry. My amendment is an edited version of the Financial Conduct Authority’s definition of a “fit and proper person”. As I was previously a senior manager in an investment management business under the FCA’s senior manager regime, I have first-hand experience of this test.

Even as laid out by the FCA, there was considerable debate about the application of the tests. I also question whether Ofwat is really the right place for such an assessment to be made. In the financial services sector, it is for the member firm to make its own determination and express its view to the FCA when seeking to register a new employee. The FCA could then query that view and potentially overturn it. Should Ofwat be required to do this, it is likely to use less professional help and real-world experience in forming that view and will require dedicated infrastructure to process applications. If the undertakers are responsible, overseeing those applications becomes relatively straightforward.

This may not be a long debate, with only one amendment, but it is an important amendment to consider when giving effect to the Government’s intentions in this Bill. In providing clarity to the undertakers, what is intended by this provision? I am most interested in the Minister’s response and hope that, if she is not happy with my amendment, she might set out who she considers a fit and proper person and how that will be communicated to Ofwat and the industry. I am also most interested to hear why the Bill’s proposal for how to implement this is different from the financial services industry, despite a reasonably long and moderately successful record within that industry. I beg to move.

[Baroness Hayman of Ullock (Lab)]

My Lords, how nice to have a quick last group. I thank the noble Lord, Lord Roborough, for introducing the last group of today with his Amendment 19, which seeks to specify the criteria to be covered by the rules on fitness and propriety, ensuring that senior leaders meet the public’s expectations.

I have mentioned Ofwat’s consultation on remuneration and governance before, and I would just like to confirm to the noble Lord that this consultation references similar criteria to those proposed by his amendment. Ofwat’s consultation seeks views on whether it would be appropriate to include a concept of “ability” in the new test, defined as an individual having adequate knowledge and understanding of the duties of the undertaker. Ofwat has stated its intention to design a fit and proper person test with criteria that will improve public trust and company culture in the water sector, having considered how other sectors are regulated around these same principles. I hope this captures the noble Lord’s concern that standards of fitness and propriety will need to be relevant and encompass concepts of knowledge and understanding. Of course, we feel that Ofwat’s independence is an important part of the trust that companies have in the regulatory regime.

The noble Lord asked why we felt Ofwat should be setting these criteria. We think it is right that Ofwat has the opportunity to consult on these criteria and that companies then have the opportunity to respond and perhaps propose different criteria. It needs to be a situation where Ofwat can then tailor these fitness and propriety standards to the water industry, rather than having prescriptive standards set out within the primary legislation. It is important that Ofwat’s independence is clearly upheld, because it will support its ability to hold senior officials to account for their actions.

Ofwat also notes in its consultation that the 16 largest water companies have a licence condition that requires them to meet the four objectives of its board, which are leadership, transparency and the governance principles. These objectives include the requirement for boards and board committees to have the appropriate balance of skills, experience, independence and knowledge. I hope the noble Lord is content that this is already being looked at; I hope that he will look at the consultation and therefore see that his amendment is no longer necessary.

[Lord Roborough (Con)]

My Lords, I am grateful for the Minister’s reply, and it is certainly very helpful. Perhaps something I could have brought out more in my initial comments were the concerns over accountability. When I look at the FCA’s senior manager regime, and the fit and proper tests, none of that is here—nowhere is there any accountability to Parliament. We will take the Minister’s comments away and give this further thought. I beg leave to withdraw the amendment.

Amendment 19 withdrawn.