Water (Special Measures) Bill [HL]

Lord Roborough Excerpts

2nd reading
Wednesday 9th October 2024 Lords Chamber

[Lord Roborough (Con)]

My Lords, I am delighted to speak at Second Reading of this important Bill, which is being followed closely by concerned members of the public across our country. I thank the Minister for her exemplary engagement with me and all Peers with an interest in this area. I am sure that we can continue to have these conversations to make the Bill as effective as possible.

We on this side of the House are committed to cracking down on pollution by water companies and we will support the Government to deliver effective measures that bring polluters to justice. While government can always do better, we are proud of our record. We increased the number of storm overflows monitored across the network from 7% in 2010 to 100% today. The Thames Tideway tunnel is now complete. This is a £4 billion project that happened because our Government faced down opposition from Ofwat and others, including Members of this House, in guaranteeing the scheme by Act of Parliament. Aided by improved monitoring, we took firm action against persistent polluters, delivering the strictest targets ever on water companies to reduce pollution from storm overflows. The Environment Agency can now use new powers to impose unlimited penalties for a wider range of offences. The effectiveness of these measures was shown this week when water companies in England and Wales were told to pay £158 million in penalties to customers, having failed to meet their targets.

In this Bill, we intend to work with the Government and the House to create the right balance of stakeholders’ interests. While the Government may not be willing to accept all our proposals for the current Bill, we hope they will get further attention in the promised further legislation.

Consumers have a right to expect affordable, clean drinking water and clean rivers, lakes and beaches. Our overall concern for consumers in this Bill is that it will add significant compliance costs to the industry that will then need to be passed on to those consumers. There is not enough clarity in the Bill on the potential fees that regulators and the Drinking Water Inspectorate will be able to charge, and we would like to understand what those fees will be and how they will impact consumer bills.

The measures on special administration orders appear to give the Government the power to change a water company’s charges paid by consumers to whatever level they wish to recover costs. It will be important to understand what work the Government have done to establish the impact these measures might have on consumer bills. The Minister mentioned that increases would be taken very seriously, but we may need more reassurance than that.

It is also relevant to raise the question of to whom water companies should pay their fines. We on this side of the House would be interested to hear whether Ministers agree that when water companies fail to deliver a service to customers that is safe and does not pollute our rivers, they are failing their customers and should compensate them accordingly. Ofwat already acts on behalf of the consumer, so can the Minister explain what assessment the Government have made of the impact of consumer involvement on decision-making? What responsibility will those consumer representatives take for such involvement given the dire consequences of failure laid out in this Bill? The noble Duke, the Duke of Wellington, made a number of suggestions which we are likely to be interested in supporting.

Our natural environment deserves to be treated better than it has been for many decades and the industry must continue to clean up its act. It is clear that those who focus on protecting our natural environment are not wholly impressed by this Bill. There have been a number of representations from River Action, Surfers Against Sewage and, as the noble Lord, Lord Lipsey, eloquently pointed out in respect of the River Wye, among others on how the Bill could be improved. We will monitor those and other suggestions with interest.

On pollution incident reduction plans, we agree that water companies need a clear plan of action to deliver positive change. However, it would be useful to know what assessment the Government have made of the practical benefits of the plans to ensure those documents have the desired effect.

We will also be looking at the measures to increase reporting of overflow events. Do the Government intend to make any distinction between events caused by third parties, such as run-off from roads, and those that are a result of failure within a water company?

I turn to employees. This sector creates livelihoods for 100,000 of our fellow countrymen and women, and we must ensure that this remains an industry that is an attractive place to build a career, while we also root out offenders. We support tough sentences for those who break the law but, to slightly repeat my noble friend Lord Remnant’s point, can the Minister explain why sending water executives to prison, under the measures in Clause 4, is really the best use of our prison capacity when current pressure on our prison estate has led to the Government implementing a prisoner early-release scheme? I ask the Minister to publish the Government’s justice impact assessment to understand the impact of this clause.

Clause 2(4) places a serious obligation on those qualifying as being authorised by the agency, and in turn will require a significant compliance effort to ensure that all those impacted are aware of the law and what their obligations are. My noble friend Lord Sandhurst has spoken about a number of other measures that touch on justice-related matters, and it is important we get this right in the Bill. I will not repeat his arguments, but we will certainly be looking to improve the Bill in those areas as it passes through your Lordships’ House.

I would also be grateful if the Minister could confirm that the measures in this Bill on remuneration and performance-related pay are designed to be retroactive, to take effect from the beginning of the financial year prior to the Bill becoming law. In addition, how will this interference in existing employment contracts work in practice? I would also agree with my noble friend Lord Remnant’s points— echoed by other noble Lords, including the noble Lord, Lord Sikka—about unintended consequences, as seen in the financial services industry, that this may simply mean that basic salaries increase dramatically.

The Bill also lacks clarity on the fit and proper person test for senior water executives. I am very familiar with how this works in the financial services industry but, in relation to this industry, I ask the Government to publish exactly how it will work, before the Bill reaches Committee. It is crucial we have more clarity on these issues, as water companies may now need compliance departments to comply with additional regulations. This will also have an impact on customer bills. What assessment have the Government made of the impact of introducing a fit and proper test and these other regulatory requirements on consumer bills? As other noble Lords have pointed out, shareholders and debt holders are essential to providing the long-term investment the industry needs, with £88 billion targeted. Returns must be sufficiently attractive and predictable to attract that capital.

We are concerned that the offences specified under Clause 6 are not listed in the Bill. The Government need to include these in the Bill rather than setting them down later in secondary legislation which noble Lords cannot amend. We would very much like to see a draft of these offences prior to Committee. As other noble Lords have pointed out, there are significant delegated powers provided in this Bill, and I echo all the comments for “More disclosure, please”.

As the noble Duke, the Duke of Wellington, and my noble friend Lord Douglas-Miller and many others mentioned, Ofwat and the Environment Agency may not be the right bodies to deliver the additional monitoring, penalties and enhanced regulatory regime required by this Bill. We would be very grateful to know what assessment Ministers have made of the performance of Ofwat and the Environment Agency before pressing ahead with a Bill that grants those regulators more powers. I particularly take note of the comments made by the noble Lord, Lord Whitty, on this subject.

We are concerned that, under the recovery of costs provisions in a special administration regime, the Government may be able to recover costs incurred in action on one company from the wider industry. That represents a risk that shareholders should not be exposed to, and I would welcome clarification from the Minister on this point.

While the Bill makes significant provisions to increase the accountability of directors, companies and employees to the Government, we would really prefer to give this accountability of management, and performance-related pay, to shareholders, by adding more clarity to the impact of regulatory actions on shareholder returns. That is likely to lead to more coherent and efficient thinking throughout these businesses and less onus on government enforcement. It is also far more likely to achieve the change in culture that many noble Lords have demanded.

The Government should not be placed in a position where they may be forced to step in and correct market failures. Given the failures of regulation to protect the industry from aggressive financial structures, we think it is appropriate to introduce a cap on the leverage that a regulated water company can have within its operating company. Should shareholders and debt investors choose to put additional leverage on these companies above the operating company level, it will be at their own risk as we cannot allow these regulated monopolies providing essential services to be threatened in that delivery. Contributions from many Members suggest this might be a welcome move.

While not within the scope of the Bill, we would also like to see water companies incentivised to work with land and waterway managers on ecosystem restoration, bringing cleaner water and better flood resilience. I very much support the comments and questions on this area from the noble Earl, Lord Devon. Within that context, I also draw the House’s attention to my interest as a land and river owner.

In conclusion, we on these Benches firmly support the Government’s ambition to deliver the cleaner rivers, lakes and beaches we all want, but we will be holding Ministers to account on the measures in the Bill in Committee, to ensure there is more clarity both for noble Lords and for the sector before the Bill goes for scrutiny in the other place. Once again, I thank the Minister for her engagement to date and I look forward to much constructive discussion about the Bill in the coming weeks.

Water (Special Measures) Bill [HL]

Lord Roborough Excerpts

Committee stage
Monday 28th October 2024 Lords Chamber

I am asking the Government to ensure that the dividends cannot be paid without a disclosure of the distributable reserves by these companies. These dividends need to be approved not just by the regulator but by other stakeholders. We need to have customers sitting on these companies’ boards, and they must vote on this. We need to have employees sitting on these companies’ boards, and they must also approve these things. At the moment the authority does absolutely nothing. If the Government are really interested in improving the financial resilience of companies, I hope they will accept this amendment towards that purpose.

[Lord Roborough (Con)]

My Lords, I thank the noble Earl, Lord Russell, for moving the lead amendment in this group. I will speak to Amendment 27 in my name.

Amendment 27 seeks to set a timeframe of six months within which the authority must publish rules regarding remuneration and governance, and it ensures that these rules are scrutinised by both Houses of Parliament through the affirmative procedure for secondary legislation. This amendment is necessary to ensure that water companies are able to review the rules that Ofwat intends to implement within six months of the Act coming into effect. The amendment will also ensure that there are mechanisms for raising any concerns within which Ministers and Parliament can scrutinise them fully.

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[The Duke of Wellington (CB)]

My Lords, I support Amendment 18 in the name of the noble Lord, Lord Remnant, which simply deletes new subsection (5)(c) on page 2. It seems to me that we cannot allow the authority—whatever it may be in the future, after the review, or even from now on—to start getting involved in the remuneration of those below board level. That really becomes too much intrusion into the way a company is run.

The noble Lord, Lord Sikka, is entirely correct that, in the end, a director of a company is a director, whether executive or non-executive, as covered by the Bill; it mentions “a director” of the company. It seems to me that, while senior role remuneration should have some guidance from the authority, that should be restricted to the chief executive and other executive board members. There is no point entering into a discussion about non-executive directors, who clearly do not participate in performance-related pay or bonuses or anything like that. I think the noble Lord, Lord Remnant, is right; it would be appropriate to delete new subsection (5)(c) and include in this clause only the chief executive and any other executive director.

[Lord Roborough (Con)]

My Lords, I thank the noble Lord, Lord Sikka, for moving Amendment 4. It is right that the Government should take steps to put appropriate pressure on water and sewage companies to reduce the frequency and scale of water pollution incidents, and imposing financial penalties on board-level executives is a powerful way of disincentivising unwanted behaviours in the sector. But if we are to have financial penalties targeted at water executives who do not meet the standards expected of them, we must ensure that these are appropriate. As we discussed in the last debate, it is crucial that Parliament gets the opportunity to scrutinise the rules that Ofwat will be implementing.

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[Lord Cromwell (CB)]

My Lords, I will speak to Amendment 13 in my name. As this is my first contribution on an amendment of my own, I thank the Minister for meeting me, for the fact sheets and the letter, and for the good news that the commission and the review are taking place. We all appreciate that. I support the Bill and welcome the commission review to come.

I turn to the amendment. As touched on by other speakers, including the noble Baroness, Lady Pinnock, in the debates on the second and third groups of amendments, company employees require appropriate remuneration, just as investors need a return. But the financial engineering introduced previously by investors and company directors—for example, debt levels, transfers to parent companies and other practices that were forensically set out earlier by the noble Lord, Lord Sikka —has enabled opaque enrichment, and has subsequently brought some water companies close to bankruptcy. That is not what monopoly water companies are for, and I believe it lies at the very heart of the current problems of the water companies.

The amendment enables the authority to include rules or guidance, as we may decide, with regard to a company’s structuring and its transparent reporting. It is deliberately left as “may” rather than “must” because the authority may want some flexibility here. Nevertheless, the amendment would act as an overt reference to the responsibility of the authority and water company employees to evaluate clearly the company’s financial structures and changes to them, and how those would impact on the distribution of financial benefits across investors, employees, directors and, indeed, consumers.

[Lord Roborough (Con)]

My Lords, I will speak to Amendment 17 in my name. I thank the noble Lord, Lord Sikka, yet again for introducing this group and raising these matters for consideration when the Government are establishing the regulations surrounding performance, pay and bonuses.

Amendment 17 seeks to clarify the definition of what constitutes performance-related pay. There are many ways in which companies can create performance-based incentive schemes. That can include multiyear programmes containing cash bonuses, share awards, restricted stock units, share options and pension contributions. In answer to the noble Lord, Lord Sikka, it rarely includes chauffeur-driven cars, private schooling or any other benefits in kind, which tend to be part of the base package.

Is the intention to capture all forms of performance-based rewards within the powers of the Bill? If so, would it not be better to be exhaustive in defining them in the Bill? It is vital that such a definition be as clear as possible to ensure that the Bill achieves its intent to punish senior executives who are not fulfilling their obligations to us all in cleaning up our rivers, lakes and beaches.

In the Bill as drafted, the rules are not clear enough as to what financial components could make up the bonus of a senior water company employee in a given financial year. The amendment is therefore necessary to prevent water companies redesigning performance-based awards to take them outside the scope of the Bill. This is not to suggest any nefarious activity, but anyone currently captured by the Bill would choose not to be if they were able. It would then become impossible for a water company not to offer schemes outside the scope of the Bill if they wanted to attract the best talent.

I understand the intention of Amendment 5 from the noble Lord, Lord Sikka. It is indeed important that we ensure that water companies have no incentives to continue polluting our rivers. We have looked at this issue in our own amendments. Amendment 27 would ensure that any rules relating to pay and governance will be suitably scrutinised, so I believe the issue could be solved without the inclusion of Amendment 5.

Additionally, I ask the noble Lord, Lord Sikka, whether he has considered the impact that this amendment would have on the hiring process of water companies. I think it unlikely that many people would respond to a job advert indicating that you may have a salary but that there is a chance that by the end of the year it could be taken away from you. If the total remuneration of senior roles is included in the Bill, it is inevitable that water companies will lose people with relevant skills and experience in the sector. That will worsen the leadership and perhaps lead to more serious issues within the sector.

It is also possible that the water companies would be forced to delegate their own management to third-party consultants outside the scope of the Bill entirely, in order to find the necessary expertise to run the companies. Have the Government given thought to how to cope with the possibility of such third-party consultants not captured by the Bill?

On Amendment 6 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, I agree that both legal and illegal dumping of sewage lead to undesirable outcomes. As such, I agree with the sentiment of the amendment. In 2022 we published the Storm Overflows Discharge Reduction Plan, which put in place targets to reduce the release of the overflow of sewage and in fact to stop it, except in situations with unusually heavy rainfall, by 2050. So we recognise that the issue is a pressing one and that action must be taken to ensure our rivers are kept clean. However, in order to stop the legal release of sewage, a substantial investment of money and time is necessary, and the amendment does not allow for such provision of time.

Our sewerage systems are a result of Victorian infrastructure design, and the increasing population and heavier, more frequent storms have led to increased pressure on this system. The suggested penalty will make it even less desirable to hold a senior role in a water company. As such, it will further decrease the number of people with skills and expertise at senior levels. This is unlikely to lead to an improvement in the water system for consumers, which is ultimately the aim we share across these Benches. I fail to see how we can support the noble Baroness’s amendment, despite the case put forward by the noble Earl, Lord Russell.

The amendments tabled by the noble Lord, Lord Cromwell, would require executives to take personal liability through their performance-related pay for unspecified structuring or restructuring that may put companies at financial risk. This would appear to us to be too vague to have much bite. It also potentially means that executives’ performance-related pay would be contingent on issues over which they might not have responsibility because they could be overridden by shareholders.

As I mentioned earlier, in response to an amendment put forward by the noble Lord, Lord Sikka, I encourage noble Lords to support Amendment 92 in my name in a later group, which would be a clear-cut prevention of payments to shareholders where there are potential issues of financial distress.

I look forward to the Minister’s response and hope that the Government will tighten up the definition of performance-related pay in line with our amendment.

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[Lord Sikka (Lab)]

My Lords, I have added my name to Amendment 100. The water authorities in Berlin and Paris are publicly owned and have stakeholder-elected directors. In most European countries, large companies have stakeholder-elected directors in them, as either a substantial proportion of the unitary board or a German-style two-tier board where one board is supervisory, and the other is executive. On the supervisory board, directors are directly elected. There are plenty of precedents for stakeholder-elected directors on company boards, and in many ways the UK is an outlier.

[Lord Roborough (Con)]

My Lords, I thank the noble Earl, Lord Russell, for moving the amendment. I want to speak in support of Amendment 22, from my noble friend Lord Remnant, as well as Amendments 21 and 23 tabled by the noble Duke, the Duke of Wellington.

My noble friend is right to note that the decision whether to be on a board, panel or committee is the job of the company rather than any kind of external regulator. By allowing the company to make that decision, it can decide based on its own business needs. If this was left to Ofwat, not only could it lead to a situation where the board, panel or committee did not fit well into the company structure but it might harm relationships between those forums and the board of the company.

It seems unlikely that a regulator would ever have access to all the information needed to make decisions on how a company’s decision-making systems should be structured, and it is surely the responsibility of the company itself to ensure that it has the right processes in place to make the correct decisions according to its needs. Indeed, as we have heard from many noble Lords, it is clear that the regulator has failed to get important decisions right in the past, to the detriment not only of companies but of the environment. Yes, of course, the regulator should have its role in holding companies to account for their decisions, but the moment regulators are involved in decision-making, it surely takes some responsibility for those choices too.

We are concerned that having consumer representatives on the board or their being involved in any decision-making within the company creates a blurring of responsibility. There is already the risk of some confusion, given the role of regulators, but they are at least experts in the industry and well informed about their roles, acting within well-defined parameters.

I agree with the noble Duke, the Duke of Wellington, on sectional interests and the effective working of a board. Consumer representatives on a board lay themselves open to the responsibilities of being a company director and in some cases a director of a listed company. Do the Government really want such consumer directors to be open to fines or prosecution for failing to deliver accounts on time, trading while insolvent or even insider dealing? It is not clear to me as the Bill is drafted that those consumer representatives could not also be subject to fines or prosecution by the regulator. If a consumer representative proposed an action that led to penalties from the regulator, how could they not be responsible?

Turning this around to the perspective of the existing board and management, if consumers are part of decision-making, then it is conceivable that they could cause or prevent an action by the company that created regulatory breaches and punitive action. How would this coexist with the responsibilities and liabilities of professional managers and board directors? How could this not create liability for the consumer representative?

My comments about consumer representation apply equally, if not more, to the environmental experts proposed in Amendment 9 by the noble Earl, Lord Russell. I understand and applaud the sentiment behind the amendment, of environmental representatives representing the stakeholder that has no natural voice, the environment. However, environmental campaigners already have a strong voice. There are obligations already present for companies, and others may be imposed through amendments to the Bill. I also agree with the noble Duke, the Duke of Wellington, that environmental representatives, alongside consumer representatives, should be limited to panels.

Allowing the company to decide the forum in which such representatives take part would benefit both sides of the agreement. If the company has taken this decision, then it becomes clear that the company, its managers and employees remain jointly responsible for decisions. I am not clear from the Bill exactly how the Government intend that its proposals should work. Both my noble friend Lord Remnant’s Amendment 22 and Amendments 21 and 23 from the noble Duke, the Duke of Wellington, have considerable merit. While there is a contradiction inherent between them, both are good solutions to creating the involvement of consumers that the Government want.

I thank all noble Lords for their involvement in this spirited debate. I ask the Minister to explain exactly how she sees consumer involvement working in practice under the Bill. I also ask that she give serious thought before Report to the amendments that I have addressed.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank noble Lords who have taken part in this debate. It has come across clearly that there is no agreement about who should sit on the boards. We want to rebuild trust in the water sector, and to do that we are giving Ofwat new powers to issue new rules on remuneration and governance.

I turn first to Amendment 9 in the name of the noble Earl, Lord Russell, and Amendment 21 in the name of the noble Duke, the Duke of Wellington. The powers on remuneration and governance outline a requirement for Ofwat to set rules on companies for including consumers in decision-making. We feel that it is appropriate for Ofwat, as the independent regulator, to determine how this is implemented. Water companies have a range of legal environmental obligations that they are required to meet, and actions related to these obligations will already be informed by specialists in the company.

We believe that introducing requirements to include environmental experts on company boards would take the focus away from involving consumers in water company decisions, which do not have the same level of legal requirements as the environment does. Environmental issues should already be a key consideration in water company decision-making. Importantly, my officials in Defra have worked to secure agreement with companies to update their articles of association, to place both customers and the environment at the heart of business decisions. I hope that this clarifies to noble Lords that the Bill ensures the prioritisation of consumer representation on company boards and that they feel able not to press their amendments.

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.

--- Later in debate ---

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.