Financial Services and Markets Bill

Baroness Wheatcroft Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

[Baroness Sheehan (LD)]

My Lords, I rise to move Amendment 42 in my name, to which the noble Baronesses, Lady Hayman and Lady Wheatcroft, have added their names; I thank them for their support. I refer noble Lords to my interest as per the register as a director of Peers for the Planet.

Amendment 42 seeks to inject a much-needed dose of realism into this Bill. I quote my noble friend Lady Kramer’s summing up of the debate on it at Second Reading:

“This is an industry that knows how to promote itself and speaks with a great sense of invincibility.”—[Official Report, 10/1/23; col. 1394.]


Yet this is also the industry that comprehensively crashed the economy in 2007. Some individuals walked away with accumulated profits, leaving the taxpayer to pick up the costs, with the most vulnerable suffering the most—as ever—through the years of austerity that followed.

I am sure that there are those who say that the financial services sector is our biggest asset; that we must unleash its potential, not shackle it with undue openness and transparency; and that we should most definitely not saddle it with an overarching requirement to safeguard the future of the one and only planet we have. However, I profoundly disagree, which is why I think that a healthy dose of realism is needed—not wishful or short-termist thinking, but reflection on what is happening to our planetary ecosystems in the real world and whether our sons and daughters will curse us in future as the last generation that could have acted in time to save the planet but did not do so.

Money matters. Money drives our economy and all our futures. We need to be able to find out easily what is being done in our name with our money. Amendment 42 is a simple but necessary one. It would require the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients. It would also require Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.

This amendment is necessary because, at present, investors cannot easily find out how fund managers managing their money have voted on their behalf. This cannot be right. Good disclosure principles dictate that investors should be able to find what they need easily, be able easily to understand what they find and be able to use what they find to make informed investment decisions. It also goes without saying that good disclosure principles are a precursor to good governance and essential to a stable financial sector.

Noble Lords will be aware that with ownership of listed companies comes the opportunity to exercise the right to vote at the company’s AGM, including on the appointment of the chair and other independent directors, to accept or reject the annual report and accounts, to appoint auditors, and to agree pay arrangements and any shareholder resolutions which have been tabled or to table resolutions if they meet the minimum threshold. Voting with or against the management and supporting or rejecting shareholder resolutions is an incredibly important tool in ensuring good corporate governance, good long-term investor returns and good economic outcomes more broadly.

Of course, it is also important for the journey to net zero. The Treasury acknowledges this in its report Greening Finance: A Roadmap to Sustainable Investing, which was published in September 2021. In that report, the Government set out their expectations that pension funds and investment managers should

“Actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation”


and

“Be transparent about their own and their service providers’ engagement and voting, including by publishing easily accessible, high-quality quantitative and narrative reporting.”


This is what Amendment 42 would do. It is necessary because, regardless of the Government’s expectations, the reality is that the complicated architecture of investment with large numbers of intermediaries, such as investment managers, insurers, consultants and additional fund managers, means that despite efforts by the DWP and the FCA to give pension savers greater transparency about how votes connected with their investments have been cast, it is still practically impossible for savers and often difficult even for the pension funds to get the information.

It is true that the FCA has made rules under the shareholder rights directive, which—in another world many millions of years ago now, it seems—the UK Government championed to improve levels of corporate governance and oversight across the EU. However, in DWP’s implementation of the directive, the pension fund must publicly report on only those which it considers significant. Guidance issued by the pension funds trade body—the Pensions and Lifetime Savings Association—recommends that around 10 out of at least 1,000 votes in which a pension fund typically has a stake should be disclosed. A fundamental weakness is that the pension fund does not have a statutory right to information on unreported votes from the fund manager, and the pension saver does not have a statutory right to information on unreported votes from the pension fund. Obscurity rules, it seems. I guess that even this weak reporting requirement will be swept away by the Retained EU Law (Revocation and Reform) Bill.

The difficulties with obtaining information on voting were covered at length by the DWP-commissioned task force on pension scheme voting implementation—I think it is called TPSVI—which reported in September 2021 and recommended that the DWP and the FCA should closely monitor delivery of vote reporting at fund level. It recommended that if investment managers do not deliver by the end of 2022 the FCA should legislate or issue handbook guidance to deliver fund-level reporting. Managers have not so far delivered.

In its letter to the DWP in October 2022, more than a year after the report, the FCA indicated that it was setting up a vote-reporting group with a view to having draft proposals by the middle of this year. However, the solution still seems entirely reliant on voluntary participation by investment management firms, which I understand are lobbying furiously against standardised disclosure. Some firms do not wish to provide reports on request because it will make them look bad and some do not want to invest in the technology to allow them to provide the data, but neither of these positions is acceptable today.

It was surprising to hear, in response to two Parliamentary Questions from the noble Baroness, Lady Ritchie of Downpatrick, that the Government do not appear to know anything at all about the voting records of UK-authorised fund managers and pension funds in relation to climate-related resolutions at AGMs. Yet the Government are reliant on the financial sector to take strong action on climate change through the exercise of voting rights.

For 16 years, the Government have had powers to require comprehensive vote reporting via the Companies Act 2006, but they have not yet used them. My amendment is intended to give the FCA, which regulates the voting behaviour of fund managers and insurers, the duty to make rules, rather than BEIS or the Treasury.

The US Securities and Exchange Commission regularly updates requirements for standardised disclosure of voting by fund managers, which must be presented in a consistent and machine-readable form, so action by our regulators in the UK is long overdue. Smart regulation is a vital aspect of retaining competitiveness, and this amendment is intended to be smart by giving the FCA the nudge to make rules and ensure that reporting is standardised, with similar provisions for pension funds, but it is not prescriptive on the details. If the FCA intends to make comprehensive reporting in standardised form mandatory, the Minister should welcome the amendment. I look forward to his response. I beg to move.

[Baroness Wheatcroft (CB)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, and I echo everything she said. I apologise to the Committee that I was unable to be at Second Reading.

I believe that this amendment is necessary if we are to have a properly active shareholder democracy in this country. At the moment, shares are not held by the majority of individuals directly; they are held through institutions, and shareholders tend to be passive. The individual shareholder does not know what is happening with his or her money. Yet when we look at how companies behave, all too often, one is reduced to saying, “How on earth could the owners allow that to go on?” Whether it is overpaying executive directors while the people at the bottom of the pile in the business are dependent on universal credit, paying the executives in the water companies huge bonuses while they pour sewage into our rivers or continuing to do business in Russia when the country is absolutely begging people to come out of Russia, too many companies behave badly, and they are not held to account.

It is very rare for institutional investors to vote against a remuneration report to the extent that a majority forces the company to think again. It is probably even rarer for institutional investors to vote against a proposed merger when it will be in the long-term interests of the executives, perhaps, but not of the workers in the UK.

We need individual investors to take a serious interest in what the business is doing. Not all of them will, but for those who are interested, it should be very easy for them to find out how their money—their shares—are being voted. It is a perfectly simple thing to do. Websites could easily be made accessible to show how the vote has been cast on every issue with every company at every annual meeting. Technology would find that quite straightforward. The majority of private individuals with investments in pension funds and insurance companies would not find it difficult to access that information, but it has to be made available.

It has to be an absolute requirement that all companies make all that information available, not just a fraction of it, and the sooner the regulators and the Government move towards that position, the better. The more information is out there, the more individuals will look at it and decide, for instance, that their company—the company in which they have a stake through their pension fund or insurance company—is not behaving as they would wish it to, and they can begin to put pressure on those who hold their shares. That might be because they are passionately involved in the employment issue or in remuneration, or because they want to see evidence that the company is taking its net-zero responsibilities seriously, and in many cases companies now have a vote on the net-zero target and how they are meeting it. Let us give the majority of people who hold shares through intermediaries the chance to see how those shares are being voted and to decide for themselves whether they approve of the way their shares are being used.

--- Later in debate ---

[Lord Harlech (Con)]

The review is necessary because it is important to take into account multiple government departments, including the Treasury, and non-governmental bodies such as the regulators. I believe it is scheduled for that time to facilitate the gathering of evidence and set out the scope of the review.

[Baroness Wheatcroft (CB)]

Rather than talking about a need for more investigation, could the Minister say what he thinks could possibly be wrong with telling organisations that they must put this information up? I cannot see the downside. Can he explain?

[Lord Harlech (Con)]

If I could go on, perhaps my further remarks will address the noble Baroness’s question; if not, I will endeavour to write to her, if that is all right.

In November 2022, the FCA convened an independently chaired vote reporting group following the recommendations made by the Taskforce on Pension Scheme Voting Implementation. The aim of this is to develop a more comprehensive and standardised vote disclosure framework for asset managers, ensuring a fair, proportionate and practicable approach. The group’s draft proposals are expected to be published in April 2023 for public consultation. Moreover, local government pension scheme funds are already required to publish an investment strategy statement, including their policy on voting rights and ESG matters, with guidance on annual reports also encouraging transparency on how voting rights are exercised.

The FCA’s Conduct of Business Sourcebook—COBS—Shareholder Rights Directive rules already require all investment firms to develop and disclose an engagement and voting policy. This includes how the engagement is integrated into the investment strategy; how environmental, social and governance issues are monitored; and how conflicts of interests are managed. This policy must be reported on annually online.

The Government believe that it would be premature and unnecessary to amend voting disclosure legislation at the current time, given the initiatives that are already under way. I therefore ask the noble Baroness, Lady Sheehan, to withdraw her amendment.