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Grand Committee

Volume 747: debated on Wednesday 17 July 2013

Grand Committee

Wednesday, 17 July 2013.

Protection of Freedoms Act 2012 (Code of Practice for Surveillance Camera Systems and Specification of Relevant Authorities) Order 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Protection of Freedoms Act 2012 (Code of Practice for Surveillance Camera Systems and Specification of Relevant Authorities) Order 2013.

Relevant documents: 4th Report from the Joint Committee on Statutory Instruments, 6th Report from the Secondary Legislation Scrutiny Committee.

My Lords, the Protection of Freedoms Act 2012 (Code of Practice for Surveillance Camera Systems and Specification of Relevant Authorities) Order 2013 and the Protection of Freedoms Act 2012 (Guidance on the Making or Renewing of National Security Determinations) Order 2013, along with copies of the attendant surveillance camera code of practice, which I will refer to as the code, and the guidance on the making or renewing of national security determinations, which I will refer to as the guidance, were laid before Parliament on 4 June and 24 June respectively. Both orders are made under the Protection of Freedoms Act 2012. This Act delivers important changes to the law, ensuring that we strike the right balance between respecting the rights of individuals and protecting the public, which reflects a key commitment of this Government. I will explain each order in turn.

The first order, on the surveillance camera code of practice, follows on from Section 30 of the 2012 Act and reflects a coalition agreement commitment to the further regulation of CCTV. The Government support the use of CCTV, automatic number plate recognition—ANPR—systems and other surveillance camera systems to cut crime and protect the public. In general terms, the public support their use. However, that support is conditional on these cameras being used proportionately to meet a legitimate aim and being used effectively in meeting their intended purpose. For too long we have seen the use of CCTV and the advance of technology develop without a proper regulatory framework, with ever greater potential for surveillance and ever greater potential to interfere with citizens’ rights and freedoms.

This code seeks to reassure the public about the use of surveillance camera systems and applies to England and Wales. Section 34 requires the appointment of a Surveillance Camera Commissioner, whose role is to encourage compliance with the code, review its operation and provide advice about it. Noble Lords may be aware that the Secondary Legislation Scrutiny Committee has considered this draft order, and the draft code, and has drawn the special attention of the House to these documents on the basis that they may imperfectly achieve policy objectives. My belief is that bringing the code into force will be a critical step in our incremental and measured approach to regulation.

We have worked closely with our partners including the police, local authorities, the Information Commissioner, the Chief Surveillance Commissioner and the Surveillance Camera Commissioner in developing this code. The code is based on 12 guiding principles which are applicable to any overt operation of CCTV in public places. Those who work to these guiding principles will be better placed to reassure the public about their intentions and to share images and information of evidential value with the police and the criminal justice system to help investigate crime and bring criminals to justice. The commissioner will provide additional information which complements the guiding principles and helps system operators turn them into reality.

We have always been clear that our approach to further regulation in this area is to be incremental and measured, starting with state surveillance and getting the basics right, then taking further steps as necessary, informed by advice from the Surveillance Camera Commissioner. This order also exercises powers under Section 33(5)(k) and seeks to add the three non-territorial police forces—the British Transport Police, the Civil Nuclear Constabulary and the Ministry of Defence Police—and the Serious Organised Crime Agency to the list of relevant authorities which will be placed under a duty to have regard to the code from the outset. Each has been consulted over the proposal and each has consented to it. Our intention in expanding the list to additional forces is to provide further assurance to the public that overt surveillance by the state is being effectively and transparently regulated.

I turn to the second order before the Committee today, which brings into force the guidance on the making or renewing of national security determinations as provided for by the Protection of Freedoms Act 2012. This order implements an important element of the Government’s commitment, set out in the coalition’s programme for government, to restore balance between the protection of individuals’ rights and protecting the public in respect of police retention of DNA and fingerprints.

We propose to commence the substantive powers in the 2012 Act from October this year. This will mark an important change. From this point, with the exception of convicted individuals, DNA and fingerprint material will not be held indefinitely. This guidance deals with a limited exception whereby it may be necessary to extend retention for the purposes of national security. We want to ensure that, in exercising their powers to extend retention by the making of a national security determination, chief officers and chief constables are doing so in an open, transparent and consistent way. This guidance seeks to achieve that. The guidance is introduced pursuant to Section 22 of the 2012 Act and is applicable throughout the United Kingdom. It sets out the basic principles underpinning the new powers, specific requirements governing consideration of necessity and proportionality and clear processes for making or renewing a national security determination, including appropriate direction as to the responsibilities of chief officers or chief constables.

The Act establishes for the first time a comprehensive regime for the retention, destruction and use of biometric material held for national security purposes. This regime is to be independently overseen by the new commissioner for the retention and use of biometric material—the Biometrics Commissioner, Mr Alastair MacGregor QC. The retention of biometric data by the state is a justifiable interference with the right under Article 8 of the European Convention on Human Rights where it is necessary and proportionate to do so and where it is in accordance with clearly defined law. The Act’s provisions, coupled with the guidance and the robust independent oversight we rightly and confidently expect from the Biometrics Commissioner, in my view achieves this objective.

We consulted extensively over the preparation of the code and the guidance which are before your Lordships for consideration today. The code and the guidance were published in draft form on 7 February and 26 March respectively for public consultation. There was broad support for these changes. A summary of the consultation responses and resultant changes made for each have been published on the Home Office’s website.

These orders are intended to build and maintain public confidence in both overt surveillance camera activity in public places and in the retention, destruction and use of DNA and fingerprint material held for national security purposes now and in the future. I commend them to the Grand Committee.

My Lords, I will say a few words because this is an area in which I take an interest. In principle, I have no trouble with using surveillance cameras around the place to find out what happened after an event and, in some cases, to anticipate what might happen. The only thing that has ever worried me is when things are linked together to try to surveil and track a population around. From that point of view, ANPR cameras could be used for purposes other than traffic management and could start to be used for tracking people. A lot of that stuff involves data protection, so all this looks fairly innocuous.

The main thing that I am worried about is whether it really does anything. At the end of it all, these are all good words. Are we just adding more cost and stuff than can be more effectively used elsewhere? It looks like we have just invented a couple of extra posts, which will be very nice for someone; it will do a bit more box-ticking so everyone will think that it has all been covered. However, if it starts being really effective, it will interrupt other people’s jobs where they do need cameras, and make them more difficult.

So I am giving a few words of caution: let us not waste public money on something that is merely a cosmetic exercise. At the same time, many of the issues that do matter in this are covered by the Data Protection Act, for instance accurate databases and things like that. So they are already covered elsewhere. Will having an extra commissioner really make a difference? It is obvious that I am sceptical about it. It does not really address the big problem about the surveillance state and things like that, but we do not have that yet, thank goodness.

My Lords, I first thank the noble Lord, Lord Taylor, for his helpful explanations and information. Just prior to the Committee, I indicated to the Minister that we are considering praying against these instruments. I apologise if he was not told beforehand, although the Whips’ Office knows. In future I would talk to them directly. These are important issues.

I want to offer the Minister the opportunity to answer my questions first, because that might alleviate some of my concerns. His answers will be very important in that regard. The noble Earl, Lord Erroll, hit the nail on the head with some of the concerns that I want to raise as well. The Minister referred to our own Secondary Legislation Scrutiny Committee, which was quite damning about this order’s ability to achieve the objectives that the Government set out. It stated:

“While the principles themselves are commonsense, some of the explanation is vague, with frequently used terms such as ‘proportionate’ or ‘appropriate’ left undefined in the context”.

Those are wise words. I would impress on the Minister the committee’s final comment, which stated:

“The House may therefore wish to question the Minister about the Government's plans for the wider application of the code and to invite the Minister to clarify how its benefits will offset the costs of the additional bureaucracy involved”.

This SI increases costs and bureaucracy to local authorities and the police of installing CCTV. The Explanatory Notes claim that this is a policy decision motivated by a desire to halt,

“the extent to which private lives are exposed to ever greater scrutiny by other individuals, organisations or the State, leading in some instances to a potential exposure to criminality, or more generally, to an erosion of personal privacy”.

That is the point that the noble Earl, Lord Erroll, made. Can the Minister say where in this order is anything that restricts the use of CCTV by individuals or private companies and makes any difference to the potential exposure of criminality that the Government have identified? I am not sure what that means in the context of this order. It may be a government objective, but it is nowhere in this order that I can find, because only public bodies—mainly the police and local authorities—are bound by the order before us today. The consultation and the order will not prohibit the installation of CCTV. What it will do is increase the paperwork and bureaucracy, making it considerably more expensive.

The Government have made a commitment to lean government, and I do not think that it was just a reference to Eric Pickles’s diet when the Chancellor said it. The impact assessment states that this extra flood of bureaucracy is not subject to the Government’s principles of “one in, two out”, in terms of regulation. Why is that? What is the point of having such a policy if the Government can then simply exempt a regulation from it? That makes a complete nonsense of the policy. The Home Secretary said:

“After years of bureaucratic control from Whitehall … this government trusts you to fight crime”,

but apparently not where CCTV is concerned. Here, the Home Office is creating 25 pages of statutory guidance for local authorities to go through—25 pages of hoops for the police to jump through before they can install CCTV.

However, it is not just the document; to compound the issue, the Home Secretary has also created a new bureaucracy in the form of a Surveillance Camera Commissioner at an annual cost of £250,000 a year. When I first read that, I thought that I had slipped back into an episode of “Yes Minister”, with Jim Hacker speaking. You could almost write the script about a Surveillance Camera Commissioner. What is not clear from the order is how the commissioner will ensure adherence to the code. Will the commissioner have any statutory powers to do so? How will the commissioner investigate? Will there be any legal power to surrender CCTV recordings? Will there be any sanctions if people do not comply with the guidance, as outlined in the order? I cannot see any sanctions in it. The code therefore becomes nonsense if there are no powers or sanctions. What is the purpose of the code?

The scrutiny committee asked what the code added to existing powers. That issue has to be addressed, particularly when taking into account the additional cost of about £1.6 million. This is significant. The police budget has been cut by a massive 20% and we are losing 15,000 police officers, the vast majority of whom will be taken from the front line—those on the beat and involved in community safety work. We could end up with the nonsense that in order to use CCTV, police forces have to employ staff to do back-office work to comply with all the bureaucracy while police officers are being lost from the front line. I am convinced that that is not what the Minister wants.

I should make it clear that we are not against oversight. There is a common-sense element in the code of conduct but, as the noble Earl, Lord Erroll, also said, these tasks are already being undertaken. I have no doubt that room can be found for improvement but it seems that this common-sense approach will be replaced by a monstrous paper trail that will include reviews, consultations and technical assessments. From the impact assessment, the cost of all this will be something like £14.1 million a year. The impact assessment also states that that is a best guess. The government readily accept that the cost could be as high as £29 million.

When one considers how onerous the requirements of the code of practice are, £14.1 million might be a conservative estimate. There need to be annual reviews of every CCTV camera and the possible effects on privacy. How will that be done? If guidance is being issued there will be obligations as to how that can be carried out. It would be helpful if the Minister could shed any light on that. All the cameras that we are talking about are those in public places, so there presumably needs to be an assessment of who goes to those public spaces in order to be able to ascertain the effects on their privacy. I cannot see any other way in which that task could be undertaken. Even if the Minister can reassure me that it does not mean that, there needs to be guidance as to exactly what is meant, and the guidance is not clear. Local authorities will produce their own ways of interpreting the guidance and say, “That is what we have to do, so we will not have a CCTV camera”.

Police forces and local authorities have to create teams to provide information about CCTV, at an expected cost of up to £114,000 for each team. There has to be an assessment of all the information being stored, and a lot of it is stored because the police may want the information at a later date if there is any criminal prosecution.

Finally, consideration has to be given to any “operation, technical and competency standards”, with a general principle that all the technology should comply. I am not clear what that means, but perhaps the Minister can help me. Is it intended that through the regulations the local authority or police, at a potentially huge cost, may have to replace equipment not because a force does not think it is working or because a replacement would be cost effective but because the equipment does not match the technical standards created by the Surveillance Camera Commissioner—although we are not yet clear as to what that role is? The commissioner could set standards with which every force must comply and they could then have to change their equipment.

There are good reasons to think that the costs may be even higher than the Government estimate. There are 11 “guiding principles” in the code of conduct, seven of which involve no monetary cost, yet each places bureaucratic obligations on the police. That will be expensive. The impact assessment claims that the cost of complying with the scheme will be found from existing budgets. If the Minister can tell me how, that would be extremely helpful. Were local government and the police specifically consulted on the costs; did they agree that they could meet them from existing budgets; and were they aware of the huge costs involved?

The Minister mentioned SOCA but not the National Crime Agency. My understanding is that SOCA has now been absorbed into the National Crime Agency, and I wonder why SOCA is mentioned but not the NCA. Can the Minister help with that point?

The Government often say that something is cost neutral. That means that it is cost neutral to the Government; the costs are passed further down the line to other organisations, because somebody has to pay for bureaucracy. Is the Minister able to explain where within the existing budgets that money can be found? Whenever I have asked questions in your Lordships’ House about budgets or service cuts for police and local authorities, Ministers say that it is a matter for local government or the police, not for them, and that it is a local decision. Ministers create the conditions that lead to cuts, because Ministers set the budget. If the Government are saying that extra expenditure has to come out of the existing budget, there is an indirect relationship. Although the local police or council may decide what cuts have to be made as a result, the decision has been imposed by government or Ministers. That is not localism, it is evading responsibility. If this order is passed, police and local councils will have no choice but to comply with the additional bureaucracy, and I do not know how they will pay for it.

We are already seeing huge cuts in CCTV. We have seen thousands of street lights being switched off across the country, including in my county, because local authorities cannot afford the increased electricity bills. What use will CCTV be at night if there are no lights on the streets? I shall not go into detail, but Gloria De Piero MP has used freedom of information requests to get some idea of how CCTV has been affected by local authority budget changes and budget cuts. The figures we have relate to public-facing CCTV cameras, not to private property cameras. Craven District Council in North Yorkshire has cut all its CCTV cameras since 2010; in Trafford there has been a 53% cut; in Blackpool it is nearly 50%; and in Bolsover it is 44%. Across the country we are seeing the number of CCTV cameras operated by local authorities being cut, and I cannot see the order before us today making things any easier for local authorities. The huge bureaucracy and paperwork will make things more difficult for local authorities.

The real question is: what is the policy intention behind this? I have read the stated intention, and like the Secondary Legislation Scrutiny Committee I cannot see that what is in the order complies with that policy intention. If it is really to achieve better oversight of CCTV, which we would not necessarily oppose, there is very little in this new regime to deliver that, but is the effect not more likely to be to reduce the number of CCTV cameras across the country? If that is the case, the level of bureaucracy and the cost to local authorities and the police will make it a pretty well designed instrument, because that seems to be the result. I do not think that that is what the public want.

At the beginning of my comments I repeated the question asked by the Secondary Legislation Scrutiny Committee about how the additional benefits will offset the costs. I have treated a number of questions, but that is the key question to the Minister. I listened very carefully to what he said, and he said that this is incremental, measured and proportionate, but I do not think that that is enough of an answer to address the comments made by that committee. If the Minister has more information, I would appreciate hearing it from him today.

The second order refers to biometric information, which is a hugely important issue. The Minister will recall our original concerns about the changes that the Government are introducing in relation to holding DNA evidence. There was a long debate in your Lordships' House, and I do not intend to repeat those debates today. The Protection of Freedoms Bill was introduced into Parliament in February 2011; it got Royal Assent on 1 May 2012, yet over a year later the Government are only now taking legal steps to provide the guidance needed on holding biometric materials such as DNA evidence and fingerprints, allowing for an extension if it is in the interests of national security. I do not understand why that has taken so long, given the implications for national security. There is nothing more important for any Government than to secure the safety and security of their citizens. Why has it taken so long, and what are the implications of that delay?

The current position is that biometric evidence, however vital it may be in fighting crime and protecting security, must be destroyed after it has been held for three years, if the person is not convicted or charged with an offence. Yet it is possible to keep it for longer if the law enforcement agencies are of the view that it is in the interests of national security to do so. The guidance to give effect to that is before us today and has taken some time to reach us. I fully understand and accept the point that such technical and important guidance must be fit for purpose. However, the Government have known about the need for such provision since February 2011, so it is hardly a surprise that we would have to have such guidance.

I have three key questions other than the one that I have just asked. What system has been in place until now for applying for an extension to hold biometric data for longer? The Minister will know from previous debates on the Bill addressed in the Intelligence and Security Committee that national security relies on bringing evidence together from various different sources, places and times—so it is a bit of a jigsaw that has to be put together. Since this provision came in, there must have been cases in which data held may have been older than three years, so what process has been used? Have there been any applications to extend beyond the three years? I am told that there have not been any, but I find that quite startling, and if the Minister could confirm that or give me further information it would be really helpful. That has huge implications for public safety since Royal Assent on 1 May last year. If there were any applications, how many were successful—or how many records have been destroyed since 1 May 2012 because this guidance was not in place? There are serious implications to those questions, and I will probably get standard number-crunching answers from the Minister, but it would be very helpful in understanding the implications of the impact of this order.

My Lords, I am very grateful to the noble Earl, Lord Erroll, for his contribution and for that of the noble Baroness, Lady Smith. It is the first time that we have had the chance to debate these issues, and some of the questions that she asks me arise because we have not had a chance to discuss these matters before. I am pleased to be able to seek to answer her uncertainty about these measures.

I have to say to the noble Earl that this is not a cosmetic measure; it is not designed as a patch, to cover something up. The recent report of the British Security Industry Association made it clear that there are a very large number of cameras in this country, and these measures will apply to just 2% of the cameras in place, because the vast majority are in commercial premises or private situations.

One feature of the current surveillance apparatus that we have in this country, which is extensive, is the relatively random way in which it has developed and the lack of quality assurance that exists within it. The whole focus of this code—and Andrew Rennison and I had a meeting today about his work in overseeing it—is going to be on improving the effectiveness of surveillance. An awful lot of cameras can take an image which is then of little or no evidential value because the camera systems have been installed to improve public confidence but do not necessarily provide images which can be used in the fight against crime. This is one of the purposes of the code of practice and the appointment of the Surveillance Camera Commissioner.

I have to say that, untypically, the noble Baroness exercised a degree of hyperbole on this issue. That is rather out of character as I usually agree with her view on issues and think that she sees them clearly. However, in this case she appears to have become confused about the cost and efficiency of the measure and its objectives, which are, after all, to protect the privacy and rights of our citizens in a public place where surveillance cameras operate. I think it is reasonable that public authorities utilising cameras in public places are placed under an obligation to ensure that those cameras are used properly, that the images are used for the purposes for which they were designed and not used improperly, and that there is a responsibility to ensure that these things are effective. If the noble Baroness wonders why this does not apply to the conventional “one in, two out” regulatory reforms, it is because this concerns not business but state institutions—local authorities and the police—and they are not included in this policy area.

The noble Baroness asked about the cost of the commissioner. The figure of £250,000 is the cost that the previous Administration identified for an interim CCTV regulator. The commissioner will encourage, advise and enable systems operators to use CCTV more effectively and proportionately to protect the public. Those words have meaning. I do not believe that “proportionately” does not have a meaning; it clearly does. The Home Office will take an early and visible lead—

I am sorry to interrupt the noble Lord and am grateful to him for giving way. However, he said that I asked about the cost of the commissioner. I did not do so as I referred to that matter in my comments. What I was asking about were the powers of the commissioner and how they could be enforced, not the cost.

The powers are clearly laid out in the instrument which places those bodies identified under a statutory obligation to comply with the code. That is what the statutory instrument is about. Those are the powers of the commissioner and his power is, of course, to see that the code is enforced by those public authorities so affected.

As I say, the Home Office will take an early and visible lead in the voluntary adoption of the code and, along with the Surveillance Camera Commissioner, will show how working with the 12 guiding principles can help build and maintain public confidence. Along with the Surveillance Camera Commissioner, we will be raising awareness of the code and its guiding principles. There will be practical advice on how to apply those principles so that where CCTV is needed it is effective in meeting its purpose. Maintaining public confidence is in itself an incentive for voluntary adoption. Not to adopt the code will be to risk reputational damage by appearing to be unwilling to engage with the public or to follow good practice.

The number of cameras is not really the issue. The BSIA’s recent report was clear that the issue is whether the cameras have the ability to meet their purpose and adhere to legal requirements.

The additional costs—the noble Baroness may care to take notice of this—incurred by a local authority are estimated to be on average £2,000 a year, and on average £23,000 for a police force. These are modest costs and are expected to bring the benefits of better quality images and help in investigating crime and bringing criminals to justice and greater public confidence. Placing a monetary value on these benefits cannot be done easily, as I think that the noble Baroness accepted, and yet they are important.

The Surveillance Camera Commissioner plans to generate a self-assessment test, which will be a speedy and efficient mechanism for an organisation—or a business in the case of voluntary adoption of the code—to assess whether it is complying with the code. This will be faster than digesting the code in its entirety and will help to demystify the principles in the code and any technical terminology used. There is no mandatory requirement to replace an existing system but organisations will be encouraged to work to approved operational and occupational standards. This can be done by better use of the existing resources. So I have focused once again on the effectiveness of the systems in delivering what is needed.

CCTV and ANPR are used in a variety of settings for a variety of purposes. Therefore, if some of the definitions are vague and general rather than specific, that is because the code does not contain a detailed, prescriptive and one-size-fits-all guidance which defines every circumstance. Some may regard it as vague but it is a matter for operators to assess necessity and proportionality when using CCTV and ANPR, and to then test their judgment with the public and their partners. This code and the Surveillance Camera Commissioner will provide a framework within which they can exercise their discretion to do so.

The commissioner will provide advice on approved operational, technical and competency standards. He is already meeting with relevant certified accreditation bodies to explore a formal certification scheme for CCTV. In addition, he is developing a self-assessment template, as I have said, to help system operators to assess compliance and to follow the code.

The noble Baroness asked about SOCA. Currently, of course, when Ministers say SOCA they mean the National Crime Agency, which will be its successor. I can demonstrate to her how public authorities have viewed the establishment of the CCTV and surveillance commissioner and his role by the response of authorities such as SOCA and, for that matter, the non-territorial police forces which have been pleased to sign up to this code. They can see the huge advantages of being part of a group of law enforcement agencies that receive the support and technical assistance of the commissioner and the reassurance that the commissioner’s appointment offers.

The noble Baroness also asked about the mechanism for enforcing compliance with the code. Perhaps I may explain. Local authorities and the police will be under a duty to have regard to the code when exercising their functions. The SI will place a statutory duty on them. When a local authority or police force fails to do so, it will be vulnerable to judicial review for a breach of that statutory duty. The possibility of being subject to such a legal challenge will incentivise local authorities and the police to adhere to that statutory duty.

Before I go on, I shall talk about DNA and the noble Baroness’s comments in that area. This is complex legislation, as she will appreciate, and considerable work has been carried out to date to prepare the relevant systems and to consult law enforcement authorities. Having made the policy decision, we undertook a full public consultation and carefully considered the responses before we brought this guidance forward. I am satisfied that it is in time and is specifically designed to address the concerns that the noble Baroness raised.

The noble Baroness particularly asked about the current legislative framework against which decisions have been made. The current legislative regime whereby material is held by the police and other law enforcement authorities is still in effect. There have been no applications to extend the retention period on national security grounds and no material has been destroyed as a result of not extending the time period on those grounds. There have been no applications, but the framework has not ceased to exist.

I am sure that the noble Earl, Lord Erroll, will be pleased to hear that under guiding principles one and two we are clear that the use of CCTV or ANPR must be in pursuit of a legitimate aim and meet a pressing need and must take account of privacy, which, as I have tried to emphasise, is the countervailing balance that this code is designed to reconcile. These first principles establish the need for surveillance and reassure the public that it is necessary.

The Government’s intention is to give communities confidence that camera systems are used to meet a legitimate aim, that they are necessary and proportionate —words which noble Lords will fully understand—and that they are used effectively to meet a stated purpose. The vast majority of systems are operated privately. However, local authorities and the police are key organisations in ensuring the safety and security of our public places—which is where the code is initially focused—and therefore have a significant interest in the use of CCTV. That is why the starting point of our journey of incremental and measured regulation is to place them under a duty to have regard to the code. CCTV is used in a wide variety of settings for a wide variety of purposes. Therefore, the code does not contain detailed, prescriptive, one-size-fits-all guidance which attempts to define every circumstance. Some may regard this as vague, but it is for operators to assess necessity and proportionality when using CCTV and then to test their judgment with the public and partners. This code will help them do so.

In this complex and challenging arena we have always been clear that our approach to regulation will be incremental and measured. Andrew Rennison characterised this as taking small but practical steps, and I am sure that that is a strategy that the noble Baroness will endorse. We are taking action to reassure the public and as a driver of public standards. We in government remain committed to ensuring that, where the powers which these orders seek are granted, they are necessary, proportionate and transparent and, crucially, that their use goes hand in hand with respect for our long-held individual rights and freedoms. Both the orders before the Committee today go to the very heart of that matter, and I commend them to the Committee.

My Lords, I am grateful to the Minister, who has sought to address the points that I have made. However, I am not convinced that he has addressed them all. I am still unclear on the point, which he did not answer, on the enforcement or monitoring powers of the Surveillance Camera Commissioner. He said that it was a statutory duty on local authorities or the police, so the fear of judicial review would ensure that they carry this out. My experience of local authorities is that the fears of the cost of judicial review often lead them not to take an action that they would otherwise take. My fear would be that the costs of a judicial review—and there are 12 principles under which they could be judicially reviewed—could lead a number of local authorities to say that they will just not bother with this because it is too much effort.

I am disappointed that the Minister described what I think are genuine concerns as hyperbole. The place to question such issues is your Lordships' House; that is our role, as well as scrutiny. I am sorry that the Minister was unhappy with that position.

On the final order, the Minister said that there have been no applications to destroy biometric information, and none had been destroyed. Can I take it that that means that there have been none over three years old? Those are a couple of points that were not raised. I shall take this back and read the Hansard to see from what has been said whether my points have been addressed.

Motion agreed.

Protection of Freedoms Act 2012 (Guidance on the Making or Renewing of National Security Determinations) Order 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Protection of Freedoms Act 2012 (Guidance on the Making or Renewing of National Security Determinations) Order 2013.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

My Lords, I am pleased to introduce the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 and the Financial Services Act 2012 (Consumer Credit) Order 2013. I will refer to the former as the RAO order and the latter as the consumer credit order.

I am sure that we can all agree that a well functioning consumer credit market is vital to the functioning of a healthy economy. However, the market is not functioning as it should, and consumers are not being properly protected. The current licensing regime, run by the Office of Fair Trading and established under the Consumer Credit Act 1974, lacks the capacity and powers to comprehensively tackle consumer detriment in a fast-innovating market. The National Audit Office estimated that there was £450 million of unremedied consumer detriment in this market last year. This Government are determined to ensure that the market functions well for consumers, firms and the economy. That is why we are moving the regulation of consumer credit to the Financial Conduct Authority next April. Consumers will be far better protected; the FCA will require higher standards of firms and will have more robust enforcement powers. However, we will also make sure that the regime is proportionate and supports a sustainable and competitive credit market.

There is widespread support for the transfer to the FCA, and agreement that we have got the balance about right. We first consulted at the end of 2010 on broad policy options. Then, following extensive work on regime design with firms and consumer groups, the Government published detailed proposals on 6 March this year.

The statutory instruments that I am introducing today take into account the feedback that we received from a wide range of stakeholders during the consultation period. These instruments effect the transfer of consumer credit regulation to the FCA under powers taken in the Financial Services Act 2012. The RAO order amends the Financial Services and Markets Act 2000, or FiSMA, and associated secondary legislation, to bring consumer credit into the scope of FCA regulation and to apply the FiSMA regulatory regime to consumer credit. The order also makes extensive amendments to the Consumer Credit Act 1974—or CCA—in relation to the functions of the OFT. The consumer credit order ensures that retained provisions of the CCA continue to apply appropriately and can be effectively enforced.

Before turning to the specifics of the new regulatory regime for consumer credit, I draw attention to the scope of regulated activity in this market. The Government’s policy is to carry forward the current scope of consumer credit regulation. We are, however, making a few key changes that were well supported by respondents to the consultation. The most significant of these relates to a new growth sector in the market, peer-to-peer lending.

First, the RAO order creates a new, bespoke regulated activity that brings together what peer-to-peer platforms do when they arrange credit agreements between lenders and borrowers. It ensures that the consumers who borrow and those who lend via the platform are both protected. Secondly, we are aligning the definitions of credit broking and credit intermediation, and narrowing the definition of credit reference agencies to capture only those who provide credit references as a primary activity. Thirdly, we are removing third-party tracing agents from the scope of regulation, as they do not carry on a financial activity. Fourthly, we are clarifying that not-for-profit debt advice is carried out by way of business and is therefore a regulated activity. This was called for by not-for-profit debt advice providers themselves, and will ensure consumer protection is consistent. Finally, in view of responses to the consultation, we are extending the current exemption for insolvency practitioners to include advice that they may reasonably provide in their professional capacity in anticipation of a formal appointment.

I now turn to the three main components of the new FiSMA regime for consumer credit. The first one is authorisation. Unless they are exempt, all firms will need to be authorised by the FCA in order to carry on consumer credit business. They will have to meet a much higher bar than under the current licensing regime. The RAO order revokes the OFT licensing regime to allow for the move to authorisation under FiSMA, but the Government recognise that a one-size-fits-all approach will not deliver their vision for a competitive and sustainable credit market.

The RAO order therefore provides for what is known as the “limited permission regime”. To be eligible for this regime, firms must only conduct certain specified lower-risk credit activity. The quid pro quo is that those firms will face lower costs and fewer regulatory burdens. The RAO order defines the activities which are eligible for the limited permission regime. They include: credit brokerage, where firms do this as a secondary activity to their main business, such as car dealers; and sellers of goods and services who provide credit without interest or charges, for example a gym or golf club.

The FCA must assess firms against prescribed threshold conditions. Limited permission firms will have to meet a smaller, modified set of threshold conditions which have been designed to suit the lower-risk nature of their business. For example, a simpler solvency test will apply. One of the advantages of the FCA regime is that it can make rules to tackle actual or potential detriment in the market much more quickly than the Government could legislate. Its rules are also binding on firms, while the OFT’s guidance is not.

The RAO order repeals certain provisions of the CCA and related secondary legislation to allow the FCA to make rules in these areas. It revokes advertising requirements so that the FCA can make rules under its financial promotions regime instead and it revokes “form and content” requirements in the CCA so that the FCA can cover these requirements in its rules.

Finally on enforcement, the FCA has a more flexible and robust enforcement toolkit than the OFT, and will have greater resources to take action on breaches of its rules. The RAO order therefore provides that certain requirements in the CCA that are currently subject to criminal penalties should instead be punishable by the FCA’s regulatory powers. Some criminal offences in the CCA will remain in force under the FCA regime, where there is greatest risk of consumer detriment.

In addition, the consumer credit order applies the FCA enforcement toolkit to provisions of the CCA which will still apply under the new regime. It also ensures that there is no double jeopardy—a person may not be convicted of an offence under the CCA where the FCA has already used its enforcement powers in relation to the same breach. The consumer credit order provides for the continued role of local authority trading standards, and the Department of Enterprise, Trade and Investment in Northern Ireland, in investigating and prosecuting offences under the CCA. Trading standards will play an important new role in supporting the FCA to police the regulatory boundary and to take action against illegal loan sharks.

Consumer credit firms should not see this transfer as wiping the slate clean. The RAO order gives the FCA the power to take enforcement action against any breach of the CCA prior to the transfer, but it will not be able to apply its rules or sanctions retrospectively, as this would be unfair to firms. Unlike the OFT, the FCA also has the power to require redress to be paid to consumers. In addition, customers of consumer credit firms will still have recourse to the Financial Ombudsman Service.

The timetable for the transfer to the FCA is driven by the demise of the OFT on 31 March. We recognise that this is a challenging timetable for firms, which is why the Government have introduced provisions to help smooth the transition. We recognise that firms will need to prepare for FCA authorisation, so the RAO order allows the FCA to grant interim permissions based on firms’ existing OFT licences. Interim permissions will allow firms to continue to trade from 1 April, but all firms will still need to apply for full authorisation by April 2016.

This approach will mean business as usual for firms but allows the FCA to deploy its full enforcement powers to protect consumers during this period. The RAO order includes transitional provisions, so that firms who have already applied to the OFT for a licence do not have to reapply from scratch for FCA authorisation and live enforcement action will be seamlessly picked up by the new regulator.

The Government are committed to promoting continuity in the conduct requirements that firms need to abide by to ensure that the compliance burden is manageable. The RAO order allows the FCA to designate, as rules, secondary legislation made under Part 2 of the CCA. The new regulator is also incentivised to replicate CCA requirements in its rules. Where rules are the same, or substantially the same, as CCA provisions, the requirement to conduct a cost-benefit analysis is waived and the FCA’s competition duty does not apply.

I hope that I have been able to explain the purpose and the benefits of these orders and I commend them to the Committee.

My Lords, I will make a brief intervention in the Grand Committee’s proceedings. These are extensive and important orders. I confess that I defer to the knowledge that other noble Lords have on consumer credit, but I would like to tax my noble friend with a request for assurances about payday loans and unsecured household credit. There have been some big changes in that field and I want to detain the Committee for a moment on that issue.

However, before I do that—and my noble friend will understand why I have been put up to this in a moment—I want to raise an issue about Article 9 of the consumer credit order, which includes provisions for local weights and measures authorities to institute proceedings in England and Wales, and in Northern Ireland. Given my accent, he will not be surprised to know that I would like an assurance that this does not mean that weights and measures enforcement cannot take place in Scotland. I am sure that he will tell me that it is a Section 30 order or some such thing but I will be able to go home more safely at the weekend if I can say that I asked the question.

I come at these orders from the niche direction of the whole question about unsecured short-term household lending. Other people have been doing a lot of work on this but the matter has been drawn to my attention simply because of the massive increase that we have started to see in the amounts of money rolled over and borrowed under the existing payday loan provisions.

The Office of Fair Trading has been doing its best but is struggling to regulate this area and to get a handle on what has been going on. I remind noble Lords that the OFT’s most recent report on payday loans estimated that between £2 billion and £2.2 billion was borrowed in paydays loans in 2011-12, up from £900 million in 2008-09; so a very big and fast increase has taken place in a very short space of time. I am not asking for payday loans to be closed down or for anything like that because the industry that provides them is responding to a real and urgent need and, in the context of the period of austerity that we are going through, that need must be recognised, but I am saying that they need to be regulated better. Clients who seek payday lenders’ services need better protection.

I understand that these orders cannot suddenly magic the OFT into the FCA. That would be unrealistic, but if we cannot do something until the Financial Conduct Authority is established, can the Minister assure the Grand Committee that the time between now and April will be used to make sure that all the powers, toolkits and the rest of it that we hear so much about will be put in place so that when we get to April 2014 he and the ministerial team will be confident that the FCA is on top of an increasing problem of lack of regulation?

The orders refer to proper and proportionate—I make no complaint about it—regulation for micro-businesses. Micro-businesses deserve exemption from some of the heavy-duty regulation but some payday organisations that provide unsecured short-term household lending are small businesses, and some of the bigger risks come from smaller businesses. Some of the bigger companies are a bit better organised and are better able to be observed and controlled. Can I have an assurance that the exemptions for micro-businesses are not going to let slip through some providers of these services who may be as big a part of the problem, although on a smaller scale, as some of their more professional, larger scale colleagues in the industry?

Can we get the Financial Conduct Authority to address what the OFT put its finger on as the problem in this market? The market is failing because the way it works is that lenders have to grab and get an established connection with a borrower. Speed is of the essence. The advertising is now so slick and makes it all seem so easy. Speed comes before proper assessments of the creditworthiness of the families and households applying for these loans. The OFT is right in putting its finger on that as the key issue. If the Financial Conduct Authority is not alive to that, it may not be able to do the job that I hope it will do.

Continuous payment authorities, aggressive debt collection and the proportion of payday loans that are rolled over are serious problems. I hope my noble friend will take all these things back to the department and that he is able to give the Grand Committee an assurance this afternoon that, come April next year, we will be confident we can deal with them. I am concerned not just about the effect on low-income households but the increase in fraud. Professional fraudsters are stealing people’s identities and using payday lenders to defraud people’s bank accounts. That is an increasing problem that we need powers to deal with.

Do the Government have any plans between now and April to talk to responsible organisations such as the Consumer Finance Association, which has a code of practice, although it is not strong enough? I would like there to be a statutory code of practice and the association wants to resist it. Do the Government have any plans to use the time between now and April to stiffen the resolve of the trade association in this area and put things on a more professional and better footing?

My final question is about credit unions, which I think are included in these orders. I should be grateful if my noble friend could confirm that. My concern is that people are starting to think that credit unions are similar to providers of unsecured, short-term household lending, and they are not the same. Credit unions have an important role but they do not give out money to people who have trouble in repaying debts, because that would destroy the credibility of credit unions. I am getting serious representations from people in the credit union sector who say that they are being confused and conflated with those short-term lenders in a way that is not constructive.

These orders are the right thing to do. I am sure that the Government have carried out the consultation properly and the orders are a real and urgent upgrade on the 1974 consumer credit rules. I am in favour of all that. However, perhaps my noble friend can reassure me on some of these issues. I am sorry to detain the Committee on a relatively small matter but these could become big issues. It is therefore right for the Grand Committee to spend some time considering them.

My Lords, I shall comment on three aspects of these orders, of which I am very supportive. First, I welcome the elements of the order that create a regulated environment for peer-to-peer lending platforms. While most industries have spent their energies saying, “Remove red tape”, this industry has been coming to the Government and the regulator saying, “Please can we have proper regulation”, because it knows that without proper regulation, rogue players can come in from the outside, undermine the credibility of the industry and probably provoke a regulator to come in with inappropriately heavy regulation as a consequence.

Can the Minister reassure me that the industry has been involved in negotiating and structuring these regulations? It looks to me as though they meet the test, but can he assure me that they reflect the kind of safeguards that that industry has already outlined in its code of conduct, established under its trade association? I think that that code was to be the basis of most of the discussions. It is a real way forward because, as we know, the banks have been very challenged over providing the credit we need in our economy, and peer-to-peer lending is increasingly coming in to fill that gap to provide both competition and additional resource, which is useful and positive.

Secondly, I pick up my noble friend’s comments on payday lenders. I share many of his concerns about this industry. Indeed, the whole House did so, as the Minister will remember, during the passage of the Financial Services Bill in 2012, when an amendment that we colloquially called the Sassoon-Mitchell amendment put very effective powers into the hands of the FCA. When it takes over supervision of this industry in April 2014, the FCA will have powers to regulate, manage and supervise it.

The powers were written with an eye to some of the regulation that has been put in place in Florida—I believe 13 states use this kind of regulation—which includes the ability to limit the amount of borrowing to $500 outstanding at any one time, to limit the number of outstanding loans, to cap interest rates and fees and to provide for a grace repayment period. It also has various other characteristics. I would like assurance that the order does not compromise the wide range of powers sought by the House in the legislation and in the amendment.

Like my noble friend, I am concerned with the impression the industry is giving of marketing energetically and raising its interest rates above and beyond what most of us already regard as high levels. I hope the FCA will be able to hit the ground running. That means going through the consultation process and deciding how it will manage that regulation.

It is also a systems issue. As the Minister knows, the various US states that have regulation have systems that allow them to see on a real-time basis what applications are taking place, what the amount is, what the interest rate is, unauthorised rollovers and so on, and they are able to manage the process. This not only allows the regulator to look at the data and intervene in retrospect, but enables it to set up systems so that if the rules are contravened an automatic decline shows up and an offending loan cannot be made. While it needs time to put such a system into place, I wonder how likely it is that the FCA will be in a position to deliver it as early as April and, if not, what the thinking is around it.

I am afraid my next question comes from my lack of understanding and my difficulty in reading my way through orders. It concerns social impact investment, the financial promotions order and its relationship to the FCA. The Minister will know that if, for example, a social enterprise attempts to create a new community hall, it can turn to members of the local community and ask them to donate. However, it cannot ask them to invest without offending Finprom unless it has become a qualified investment, which is financially impossible for any kind of small project.

We raised this issue during the passage of the Financial Services Bill and the Government expressed their desire to deal with this problem and enable a project to turn to individuals with small amounts of money and allow them to invest. Will the FCA have the necessary power to make those changes under Finprom without having to come back for new primary legislation? I assume that, in the end, we will see a kind of materiality clause that will state that if you want to make an investment of less than £500, or whatever, you will not have to go through all that incredible palaver and you will be able to do so. Will these orders affect that, or will it fall outside their scope?

My Lords, I thank the Minister for his clarity in introducing these orders. Very often we are not wholly behind what the Government are doing but, on this one, we are. We welcome the move to the FCA and these SIs. I have supported the policy behind them for a long time, but I do not know for how long my party has done so. We particularly welcome the powers they give to the FCA. As the Minister implied, they will be its enforcement tool kit for consumer credit and will strengthen its powers to punish misconduct. We also welcome the Government’s decision not to exempt small businesses, as that might have weakened, rather than strengthened, consumer protection.

I have two concerns, and a very small one which I hope to raise. I know that the first will be familiar to the Minister. It is the concern raised by R3 Group about insolvency practitioners who are already regulated, albeit by a plethora of recognised professional bodies. R3 pointed out that the exemption for insolvency practitioners—which both it and we welcome—might not work quite as intended if it covers only any pre-appointment advice which is reasonably likely to lead to an appointment. R3 is worried that IPs, having given advice and heard more, may consider that formal insolvency is not the right way forward. R3’s question is whether the earlier advice that it gives requires it to be FCA authorised. It has a slight worry that if it did, it might find itself recommending insolvency in order to avoid double regulation, which would clearly not be to anyone’s advantage. It might have to do that to avoid double regulation or bite the bullet and be regulated. However, that would probably be too expensive, particularly for smaller IPs. Is the Minister sure that the term “acting with reasonable contemplation of appointment as an insolvency practitioner” will not force IPs into launching a formal insolvency, rather than giving general debt advice, in order to avoid such double regulation? I hope that the Minister will give some comfort on that today. If not, perhaps he will talk further to R3 about it.

The second issue is payday loans, and I make no apology for returning to it. This has already been raised by the noble Lord, Lord Kirkwood of Kirkhope, and the noble Baroness, Lady Kramer. We and the charity StepChange are concerned that the staged transition to FCA regulation may allow payday loan companies to continue to run on a business model based on multiple rollovers of debt, with predictable and rather serious consequences for the borrower.

We very much welcome the FCA’s power to consider business models, especially given what we know about this industry. The OFT found that half the revenue of these firms comes from loans that are rolled over at least once and one-fifth of payday loan companies’ revenue comes from customers who are forced to roll over a loan four or more times. Their very business models are based on people getting into debt trouble. That is why the scrutiny of business models is so much needed, but—to echo other noble Lords—it is needed now, not in three years’ time.

Will the Minister confirm that the interim permissions regime, which allows for staged transition to FCA regulation, will not be used by payday loan companies to delay that scrutiny of their business models by the FCA? The Minister knows better than us, because it is in the impact assessment, the figures from StepChange, which suggest that unaffordable, unsuitable credit is a key contributor to its clients’ debt problems. Furthermore, many of the worst examples of poor conduct seen by that charity include firms that operate very much at the margins, lending to lower income and vulnerable consumers. We do not want to wait until 2016 for the FCA to cast its—hopefully—extremely beady eye over these firms’ business models. We therefore look forward to quick and effective implementation of the FCA credit regime.

Lastly—and this is a very small issue—the FLA has raised with us its anxiety that the new rulebook is not yet available in draft, and it wants the Government and the FCA to ensure that arrangements for the new regime coming into operation in April will be promulgated in good time. That does not seem too much to ask; we simply seek some reassurance on progress on that matter.

We welcome and support these SIs and hope that the Minister will be able to give us those small bits of reassurance.

My Lords, I am grateful to all noble Lords who have spoken in this debate and for their broad welcome for the provisions that we are introducing.

The noble Lord, Lord Kirkwood, asked about Scottish weights and measures. He will have read Paragraph 9, which says:

“Local weights and measures authorities may institute proceedings in England and Wales”.

As he will know, it would be completely improper in Scotland for anybody but the Lord Advocate to initiate prosecutions. I have no doubt that he will wish to talk to his noble and learned friend Lord Wallace of Tankerness, as I am sure that he is doing his job properly.

The noble Lord, Lord Kirkwood, concentrated, as other noble Lords did to a certain extent, on payday loans and what is happening about them. The FCA has a formal responsibility for managing payday loans from next April, but it is not waiting until next April to start to think about the issue. Indeed, it is going to set out draft rules in September for a consultation. I am sure that many people will want to get involved in that consultation. That gives a certain amount of time to get rules in place by the time it takes over the formal responsibility. The FCA has also reminded the banks of their obligations when cancelling continuous payment authorities, which is obviously an issue for payday lending consumers.

The noble Lord said that he hopes that micro-businesses will not be exempt from this provision because they are very important even if they are not very big. The micro-business exemption does not apply in this area; that would obviously compromise consumer protection because there are a lot of small businesses. Although we tend to be familiar with a number of brand names, very often the worst offenders—literally—are small, local operations.

BIS has launched a review on voluntary payday codes that will survey lenders and consumers and provide a sense of progress. The codes were implemented by lenders last November, and we expect BIS to publish findings in the autumn. We hope that will put pressure on the trade association to raise its game ahead of April.

The noble Lord made the point that credit unions are not a perfect substitution for payday lenders, and I completely agree. The extent to which the two seem to be equated with the good and bad ends of short-term lending has rather surprised me. Credit unions are really vehicles for people who take a longer-term view of a loan. If you are signed up to a credit union and have established a history of savings, it can help if you get into difficulties and can act in the same way as a payday lender would, but they are very different. The other problem is that, in many areas, there is no credit union of any significance or it is quite difficult to find out about it. Having said that, the Government support credit unions, and we are doing a number of things to make them more attractive, such as increasing the maximum rate of interest that they can charge from 2% to 3%, but as the noble Lord said, they are a partial solution to the problem.

The noble Baroness, Lady Kramer, began by discussing peer-to-peer lending. I congratulate her on the extent to which she has been able to raise peer-to-peer lending as an issue in this House and more broadly and has encouraged the Government to come forward with these regulations. We are in discussions with the industry. We were actively engaged with it before we produced these regulations and it has been very keen to be regulated because it, in a sense, gives a stamp of authority to the whole sector which, for a new sector, is very welcome.

On payday lenders, the noble Baroness asked whether the order in any way compromises the FCA’s ability to undertake a number of things, including a capping power. It does not. That was one of the issues that it will consider as it thinks about its rule-making power. She described the conditions in Florida which have enabled very effective regulation of payday loans while enabling the payday loans sector to carry on in operation. Like her, I have been extremely impressed by the extent to which Florida has managed to go a long way to solving the issue that we are grappling with, which is how to ensure that poorer people can get access to money when they need it but do not get fleeced. We hope that there are some lessons that we can take from Florida, not least on a real-time payday database, which the FCA is very interested in. If we decide to go for it, it will take a bit of time to put in place, and it would be expecting a bit too much to think that we could do that by next April.

The noble Baroness asked about social investor exemption from the financial promotions regime. These regulations do not affect the rules in that respect. We are actively looking at how we can resolve the problem she explained. The challenge is, as ever, to make sure that we are able to put in place a regime that not only allows the kind of lending she is talking about but safeguards consumers. That is the balance we are still grappling with.

The noble Baroness, Lady Hayter, asked about R3 and its concern that in extending the exemption for insolvency practitioners, in part in response to its concern, we might not have got it quite right. We are pretty confident that the extended exemption that is designed to give comfort to insolvency practitioners when giving advice will do that without running the risk that she talked about. Officials have been and will remain in discussions with them to make sure that their fears are put to rest. We do not believe that they need to be worried.

The noble Baroness raised multiple rollovers of debt and hoped that we will not delay work in this area. The FCA is very much on to this. There is no delay. The business models of payday loan companies is one of the things it will look at.

Finally, the noble Baroness asked when the rule book will be available in draft. It will be available in draft early in the autumn, and we hope that the FLA and others who have a direct interest in it will, as they have until now, play a major part in scrutinising it and giving us their views. I hope we will be able to come up with something that they will find easy to live with.

I hope that I have answered the questions that have been raised, and I commend the order to the Committee.

Motion agreed.

Financial Services Act 2012 (Consumer Credit) Order 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Financial Services Act 2012 (Consumer Credit) Order 2013.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments

Motion agreed.

Sitting suspended.

Companies and Partnerships (Accounts and Audit) Regulations 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Companies and Partnerships (Accounts and Audit) Regulations 2013.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

My Lords, I beg to move that this Committee considers the following three statutory instruments, which I will speak to in turn: first, the Companies and Partnerships (Accounts and Audit) Regulations 2013; secondly, the Companies Act 2006 (Strategic Reports and Directors’ Report) Regulations 2013; and, thirdly, the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.

With my apologies to noble Lords for beginning this debate with a technical and specialised subject, I will introduce the Companies and Partnerships (Accounts and Audit) Regulations 2013. These regulations close a loophole in the implementation of the EU Fourth Company Law (Accounting) Directive. They do this by amending the Companies Act 2006 and the Partnerships (Accounts) Regulations 2008.

The businesses most affected by these amendments are limited partnership investment funds in the private equity, venture capital and real estate sectors. These specialised businesses have been aware of the planned changes as far back as 2010, when BIS consulted on closing the relevant loophole. The loophole allows certain limited partnerships to avoid preparing accounts and reports where these are required by EU law. Accounts such as those for limited liability companies are required where the partnerships in question are structured to have limited liability.

Work on these regulations started as soon as this problem was identified. Following the 2010 consultation, we have continued to work with stakeholders who responded. Certain other unlimited companies and general partnerships are also affected, but we believe there are few, if any, of these in existence. The amendments in the regulations close the theoretical loophole that is available here also.

By way of background, these loopholes originated in the 1993 regulations that first implemented the relevant provisions of the EU fourth directive, after they had been inserted into that directive, in 1990. The defective drafting that caused the loophole was then carried over from the 1993 regulations into the Companies Act 2006 and the Partnerships (Accounts) Regulations 2008, so these regulations insert a new systematic definition of a “qualifying partnership” into the Partnerships (Accounts) Regulations 2008. This replaces the previous definition, which contained a technical drafting error. The regulations also insert a systematic definition of what is meant by the “members” of a qualifying partnership. This addresses similar technical drafting errors and removes some previous unnecessary gold-plating.

The regulations also correct the implementation of requirements relating to the publication of a qualifying partnership’s accounts. Where a qualifying partnership has no UK limited company members or EU equivalents, the regulations ensure that accounts are made available for inspection in the UK. Where the qualifying partnership has no principal place of business in the UK, it will now have to publish the accounts at a nominated UK address. This ensures that the directive requirements are met and are enforceable under UK law.

These regulations also address a separate and unrelated issue in order to complete the implementation of the 2009 EU electronic money directive. They ensure that all forms of e-money issuers are covered by the full audit and accounting requirements of the Companies Act. These amendments were missed when the EU electronic money directive was implemented in 2011 and have been developed in consultation with the Financial Conduct Authority and HM Treasury.

The impact assessment published with these regulations estimates that between 5,000 and 8,000 limited partnership investment funds are affected. The costs are likely to be between £8,000 and £30,000 per fund per year in accounting and audit. These costs would be likely to double in the first year, as the relevant partnerships and their auditors will have to prepare and audit full accounts for the first time. The costs will also be higher for around 10% of limited partnerships, which will have to prepare consolidated accounts. The remaining 90% will be able to take advantage of recent changes introduced to UK accounting standards, which allow them not to produce consolidated accounts.

The revised regulations have the following important effects. First, they increase the transparency of accounting and reporting by the partnerships affected and, secondly, they address outstanding issues with the implementation of two EU directives. The changes take effect for accounting years beginning on or after 1 October. The limited partnerships affected will have at least the whole accounting year to prepare.

I now turn to the second statutory instrument under consideration, the Companies Act 2006 (Strategic Reports and Directors’ Report) Regulations 2013, which covers narrative reporting. The Government cannot overemphasise the importance of clear concise narrative reporting by companies. The annual report is a key tool for shareholders to understand how their company operates, to hold it to account and to promote informed discussion at the company’s annual general meeting.

Over the years, the average length of annual reports has risen to more than 100 pages, with the longest being more than 500. This makes key information difficult to find and makes it hard for shareholders to gain an immediate understanding of how their company operates. To quote Sir Winston Churchill:

“The length of this document defends it well against the risk of its being read”.

That is why we propose a simplified framework to help companies focus on the key messages that they want to communicate to their shareholders.

Specifically, the Government will require the creation of a new section of the annual report—the strategic report—in which we expect companies to discuss their strategy, their business model and their principal business risks. The current structure is unhelpful to shareholders as this information is not in a prominent place and can be hard to find. We will also ask quoted companies to disclose other information necessary to understand their business, including about their impact on the environment, social and community matters, their employees, and human rights issues that the company needs to address.

For example, the tragedy in Bangladesh brings into sharp focus the need for companies to produce high-quality reporting on their social, environmental and human rights issues. Although there is no specific requirement for companies to report on their supply chains, the requirement in these regulations to report on human rights will provide a proportionate regulatory response. However, we recognise that business and government can do more, and the Government intend to publish the UK action plan on business and human rights later this year.

Businesses should be aware of the compelling case for respecting human rights in their activities, as it reduces operational risk, promotes prosperity and helps to establish a stable and sustainable market. The requirement to report on human rights will focus the corporate mind on these obligations and provide evidence for shareholders to hold their company to account.

The UK faces unprecedented challenges in the current financial climate, with businesses operating in one of the toughest economic situations we have ever seen. It has never been more important to capitalise fully on the skills and talents of all people, regardless of their gender. This is about improving the performance and productivity of companies. More diverse boards with a plurality of views and experience will be in a better position to compete in the global marketplace. The noble Lord, Lord Davies of Abersoch, made recommendations in his review, Women on Boards, published in 2011. The gender disclosure requirement in the narrative reporting regulations supports this work. These regulations will require companies to disclose the number of employees of each gender on their board, in senior management positions and in the company as a whole. This will help investors to identify those companies that are most effective at developing their staff.

We are also asking companies to disclose their greenhouse gas emissions. The Climate Change Act 2008 required government to look at company reporting of emissions. This is something that we have consulted extensively on and I know is widely supported by companies, investors and civil society organisations. While we encourage companies to go beyond mere compliance, these regulations set out minimum requirements for companies to report their emissions in a transparent way with least burden to the business. Specifically, we propose that companies disclose their annual greenhouse gas emissions for activities for which they are responsible. This will provide the key data that investors and others have said they need to see.

The Government have consulted on the reporting regulations several times. During these consultations we asked respondents to suggest disclosure requirements that have become outdated or that provide no meaningful disclosure. For example, we are removing the obligation to report on essential contractual arrangements. Should the company have specific concerns, it should highlight these to the shareholders as part of its risk disclosure. The Government will also no longer require companies to disclose their charitable donations. While we encourage companies to engage in philanthropy, we have no evidence that this disclosure affects charitable giving while the disclosure itself has become burdensome to business.

We are also removing the requirement for reporting on policy and payment of creditors. This disclosure provides little information to the shareholder as to how their company pays its creditors. However, we do take this issue seriously. In November, my honourable friend in the other place, the Minister for State for BIS, Michael Fallon, wrote to companies to encourage them to become signatories to the prompt payment code.

Sitting suspended for a Division in the House.

My Lords, as I was saying, in removing the requirement for reporting on policy and payment of creditors, we are taking this issue seriously. In November, my honourable friend in the other place, the Minister of State at BIS, Michael Fallon, wrote to companies to encourage them to become signatories to the prompt payment code. By 1 April 2013, more than 1,371 organisations had signed up to the prompt payment code. These regulations are not intended to stand alone and will be supported by guidance from the Financial Reporting Council. This guidance will be published for consultation in the coming weeks and will provide help for those companies whose thinking on their reporting is still in development.

I turn now to the third statutory instrument on today’s agenda, the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, covering reporting of directors’ pay. It is worth taking a few moments to elaborate on the reasons why it is important to make company reporting on directors’ remuneration more transparent. As the Committee will know, the Government’s comprehensive reforms to executive pay addressed concerns that the link between directors’ pay and performance has grown weak. This is damaging for the long-term interests of business and it is right that the Government are acting to address this failure.

These draft regulations are the final part of those reforms. Changes to primary legislation contained in the Enterprise and Regulatory Reform Act have given shareholders new voting powers to hold companies to account. These regulations give detailed effect to those changes for shareholders by setting out the information that quoted companies must include in a directors’ remuneration report. As a package, these reforms contribute to the Government’s wider aim of establishing a corporate governance system that supports long-term, sustainable growth. The regulations focus on the content of the company’s report on directors’ pay. They cover both the required disclosure of pay policy and the improved transparency of reporting on pay and I shall deal with those in turn.

First, on the remuneration policy, the Enterprise and Regulatory Reform Act amended the Companies Act 2006 to give shareholders new voting powers to hold quoted companies to account on directors’ pay. Quoted companies must put their remuneration policy to shareholders at a minimum interval of every three years. These regulations give effect to those changes by setting out the details of the information that quoted companies must give to shareholders in their directors’ remuneration policy. The policy must include: first, a description of the elements that make up each director’s remuneration package, such as salary, pensions and bonus; secondly, the maximum that may be paid for each of those elements; thirdly, an explanation of how payments are linked to different levels of performance and how that performance is measured; and, finally, the company’s policy on recruitment and exit payments.

In addition to the directors’ remuneration policy, companies will be required, as they are now, to produce an annual remuneration report setting out what directors have been paid in the past financial year. Remuneration reports can currently be long and opaquely written, which is why we are proposing significant changes to those reports to make it much clearer to investors how much directors have been paid and how this links to performance. In the new annual remuneration report, companies will have to: first, report the amounts paid to each director in terms of their salary, pension, benefits, annual bonus and long-term incentive plans, and provide a single figure for total pay; secondly, explain clearly how the payments relate to performance by giving details of actual performance against the targets set and how that relates to the amount received; and, thirdly, provide contextual information, including details of the fees paid to remuneration consultants for advice to the company relating to directors’ pay, and a comparison of the change in pay for the chief executive and the wider company workforce.

Under the changes to the primary legislation, shareholders will continue to have an annual advisory vote on a remuneration report. However, where a company’s shareholders reject the annual remuneration report, the company will be required to resubmit its pay policy to a binding vote at the AGM the following year.

I would make it clear that these reports are not intended to be long legalistic documents but to provide clear and meaningful information to company shareholders which allow them to hold the company to account. These regulations replace the current 2008 regulations on reporting and will apply to the same group of companies as at present—in other words, the approximately 900 quoted companies registered in the UK whose shares are listed on the main market.

These regulations have been developed in close consultation with a wide range of interested parties, including companies, investors and unions, to ensure the reforms achieve the policy intentions in a workable and lasting manner. This has been a challenging task and we are satisfied that we have successfully found the right balance. Indeed, several major companies have already started to adopt some of the new disclosures in this year’s annual reports.

I recognise that these are big changes, but we expect these regulations to be accompanied by industry-led guidance to aid companies and investors in their implementation of the regulations. We welcome this guidance, which is being developed by companies and investors together and is scheduled to be available in September. The guidance will be of real benefit in ensuring that companies provide a meaningful level of detail to their shareholders. However, and arguably more importantly, it also demonstrates the impact of improved engagement between companies and investors, engagement which we are starting to see and which will be the final part of making sure that these reforms lead to real and lasting change. I commend these orders to the Committee.

My Lords, I am grateful to my noble friend for his clear explanation of the three instruments. I want to focus my remarks on the last two—the strategic report regulation and the one that is concerned with directors’ remuneration. Before I go any further, I need to declare an interest, which is on the register. I am the senior independent director, or SID, of a FTSE 250 company, and the chairman of its remuneration committee. So these orders are far from being of academic interest to me. On Friday, the day after tomorrow, I will meet our remuneration consultants in Wolverhampton to discuss the implications of the instruments that we are talking about this afternoon. It is important that we should move sometimes from the rarefied atmosphere of this Committee Room and see what the things we discuss are going to mean on the ground and their real implications for British industry. With great respect to my noble friend and his officials, sometimes the reality of what is being proposed is some way distant from the undoubted good intentions with which the regulations are drafted. If this makes me sound a bit parochial, I am afraid that I am not going to apologise for that, because what we are considering and will no doubt pass today is going to affect 900 of Britain’s largest companies. I am concerned with the practical implications.

The business of which I am director is not a complex one. We brew beer in five breweries up and down the country and run just over 2,000 pubs across England, Wales and Scotland. We have no overseas operations and a pretty simple business model. I say that to my noble friend so that we can set in context the remarks that I am going to make about these two sets of regulations.

The Committee should be aware that, in 1995, our annual report was 25 pages long; by 2000, it was 41 pages long; and by 2005, it was 76 pages long. In spite of the observations in the Deloitte study included in the documents that have been circulated, which suggests that the size of annual reports is sloping off—I have yet to see a company whose annual report is shortening—last year it had gone up by a further 20 to 96 pages. So in 15 years, we have gone from 25 to 96 pages. I have to say that I do not think that that has helped the shareholders.

I looked through the objectives in the Explanatory Memorandum for the strategic report regulations, which says at paragraph 7.5:

“The suggested restructure and simplification of the reports aims at giving all stakeholders … the information they need in a clear and effective way so they can be active stewards of the companies they own”.

I thought, “Amen to that! Terrific!”. When my noble friend says, in his clear explanation, that we are going to simplify the framework, I say amen again. However, he went on to say that there is going to be a new section of the annual report. That does not sound like simplifying, it sounds like extending. It may have a simplified bit in it, but it does not sound to me as though we are going to shorten it, because he then went on to say that we are going to require the disclosure of other information.

I am particularly concerned about the growth in the annual report and, as I will explain as we go along, the effect that the growth in the size of annual reports has on individual shareholders. The fact is, as the Explanatory Memorandum makes clear, institutional shareholders are fine. They will turn up at our door, knock and say that they want to know about this, that or the other, and we will say, “God bless you guv’nor” and tell them. I am much more concerned about the average small shareholder.

We have a big shareholders’ list, probably not unconnected with the fact that we offer free pints of beer to every shareholder who comes to our annual general meeting. For small shareholders, less can often be more: something shorter and better focused can be attractive and advantageous. We are talking about a strategic report, concerned with the essence of what drives a company, but when I look at new Section 414C that is to be added to the Companies Act 2006, headed “Contents of strategic report”, I see that it has 14 subsections and begin to think, “Hello, what is going on here?”.

New Section 414C(7)(b) states that a quoted company’s strategic report must include information about,

“environmental matters … the company’s employees, and … social, community and human rights issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies”.

We have 2,000 pubs and five breweries. What are we going to write? It will be either a telephone book or the most anodyne and superficial stuff, because you cannot move between the two easily. What will happen is that the consultants will come along and say, “These are the words you need to use in your annual report. They will meet the requirements of the strategic report which we will approve this afternoon”.

New Section 414C(2)(b) says that the strategic report must contain,

“a description of the principal risks and uncertainties facing the company”.

That makes no distinction between risks that we can control and those we cannot. The major risk that we face is what happens to the UK economy. If it goes badly wrong, people do not go to the pub, they do not eat at the pub and they buy their beer more cheaply at the supermarket. However, saying that would give such a broad statement that it will be of little value to the company or the shareholders. Surely it would be much better if the regulations placed more emphasis on describing the key risks that were within the company’s control, rather than such broad generic statements, as I am sure we will get to.

At the other end of the spectrum, at the micro level, when we get to new Section 414C(8)(c)—and remember that we are discussing a strategic report—it states that it must include,

“a breakdown showing at the end of the financial year … the number of persons of each sex who were directors of the company … the number of persons of each sex who were senior managers of the company … and … the number of persons of each sex who were employees of the company”.

The employment of women is critical. Believe me, when my noble friend goes to the pub on the way home tonight he will find that a lot of the bar staff, the people who work there and a lot of the managers are women. However, do we have to have this in a strategic report? Is this going to add to the sum of human knowledge and put a shareholder in a better position to make a proper assessment of the company’s position going forward? Less is more.

My concern about these regulations, worthy though their purpose is, is that they do not provide enough specific focus for an individual company. We are going to get a series of bland statements. We are going to have a meat cleaver rather than a surgeon’s knife. The regulations continue to put far too great an emphasis on reporting the past, judge the ship by the shape of the wake and do not provide directors with sufficient safe-harbour provisions in respect of forward-looking statements. For noble Lords who are not familiar with the term “safe harbour”, it describes a means whereby you can say something about the future without being sued for doing so, provided that you do not say something that is utterly reckless.

We want directors to be encouraged to make more forward-looking statements, because that is what it is all about. To do that, they need proper safe-harbour provisions built into these regulations. I do not see them there and I hope that my noble friend can say something about this when he winds up. To be really helpful to shareholders, actual and potential company reports need to look forward and peer into the fog of the future, but directors will be reluctant to do so unless they have adequate protection.

After that tirade about the utility of the strategic report, I turn to the directors’ remuneration regulations. I understand the Government’s position given the public anger and concern about what are seen as unreasonable rates of pay and rewards for failure. I certainly support the idea of a binding vote for shareholders, but company remuneration reports need to take place against an informed background.

These regulations require very complex executive remuneration figures to be reduced to a single number. I understand the attractions of simplicity but, for example, let us take the “Single Total Figure Table” set out under Regulation 5(1). I invite my noble friend to consider column “e”. The problem is that we are required to have a single figure to deal with all pension-related benefits. Pension valuation is an arcane, obscure and difficult subject and has been known to make strong men weep. A tiny change in the gilt rate, which forms the basis for discounted future liabilities, has a dramatic effect on future values. Last year, the remuneration report that I signed off for my company showed that the transfer value of one executive’s pension had increased by £542,000 from £2.8 million to £3.3 million. Had we paid him more? No. Had we paid him less? No. We paid him what we had always paid him. Yet, because of the way that gilt rates and valuations work, there are these huge swings. He had no control over that and we had no control over that, which leads to obscurity, misinformation and shareholders not getting accurate and proper information. I am not sure how, with those sorts of disclosures, we are going to avoid perverse conclusions being drawn. We have on our board two executive directors. Every year, we are now going to have three shareholder votes to deal with their pay. I do not mind having three votes and I do not suppose that the shareholders do either, but it is a sledgehammer to crack a nut.

My noble friend mentioned that many remuneration reports were long and opaque. He said that the purpose was not to have long legalistic documents. The remuneration report that I signed off for last year’s chairman of the remuneration committee was eight pages long. We have received the first draft from our remuneration consultants on what will happen when we pass these regulations into law, because we are discussing the matter on Friday. Surprise, surprise—it is 21 pages long. So it is not going to be a shorter document. It may perhaps be less opaque—I do not think it is—but it will be nearly three times as long. I am not against transparency or disclosure, but I want the Government and the Committee to realise the practical implications of what we are passing today. What we are trying to do is worthy, but the results are not as we hoped.

In relation to these regulations, will my noble friend give an undertaking that we will look at them in three years to see whether they have had the effects that we want them to have? I went out a few minutes ago because my phone rang, and it was our remuneration consultant because I had rung her to say, “We’re discussing this in a few minutes. What do you think about it?”. I wanted to get her views. She said, “I think they’re a complete waste of time. I don’t think they’ll achieve anything the Government seek to achieve at all”. So I think we need to look again at this and I hope my noble friend can agree to do that.

Each time we look at these regulations, we need to think carefully about what we can remove. I know my noble friend gave some examples. He talked about removing the disclosure of charitable donations. That is one line. It is, “The company gave no charitable or political donations”. I am delighted to have that out, but we have to do some serious restructuring of the way we handle and publicise company accounts.

Who are the winners and losers of these regulations? The first and biggest winners are the accountants. No wonder the Financial Reporting Council is saying that it wants to show how to do it better. More stuff will need verifying, more people will need to go in to check and more people will need to prepare the reports, which will be huge. Remuneration consultants will be winners because they will have an opportunity to sell their wares. Lawyers and actuaries are coming along behind because they, too, will be asked to verify and ensure that we are complying with this increasing raft of regulations. The losers will be the companies, which will undoubtedly have to add to their non-productive resources to collect all this information and put it together in a comprehensible form. Will these regulations benefit shareholders? The jury is out. Possibly they will, but I think it is all going to be lost in the wash.

At some point, the Government—the department—are going to have to look at the balance between process and judgment. These regulations extend process. We will tick the boxes and do it all, we will make sure that we disclose whatever, but I confidently predict that when our annual report is published in November it will not be 97 pages; it will be between 110 and 120 pages. They will add between a quarter and a third to it.

I have one final point. UK plc needs first-class men and women to act as executive and non-executive directors of our public companies. They are the backbone of our economy. We need to strike a balance and find an appropriate level of transparency and disclosure while avoiding a situation where the personal financial rewards that quite rightly follow commercial success lead to finger pointing and the politics of envy. It is in all our interests to ensure that this balance is properly struck, but I am not sure that we have achieved it this afternoon.

My Lords, I do not profess to be very expert in this area, but I declare an interest as vice chair of the Ethical Trading Initiative and somewhere in the comprehensive report from the noble Viscount there was a reference to environmental, social and human rights issues and supply chains.

I do not have a lot to say on the first set of regulations, which seem to be about tidying up and closing a loophole, although the question of whether there would be any tax consequences as a result of the changes occurred to me. I thought the point about narrative reporting was interesting and I could not help reflecting on the experience of the noble Lord, Lord Hodgson, and the range of his comments. I suppose there is one side of me that inclines to what he says—that less is probably more. He is probably right. As a small shareholder myself in a number of companies, how many times do I bother to wade through the annual report? It is not very often, unless I am really desperate in my reading material. However, I think that the companies that we are talking about have a duty to report comprehensively and responsibly. We do not want any more of it than is necessary but we cannot honestly say that everything is right these days and that we are in a climate where nothing bad happens or where companies’ behaviour is always perfect. The Minister conveyed a lot of interesting information to us about narrative reporting.

Overall, I welcome the new strategic report section and the way that it will deal with environmental, social and human rights issues. The Minister mentioned Bangladesh, which is just one example of how this can impact on companies. What I did not hear in all his comments was any mention of ethics, which are important to the way that companies behave. If this points them in that direction, that is a good thing. Company policy on ethical behaviour is becoming more and more important. We see large companies behaving very irresponsibly and unethically, and then being required to make enormous payouts. The recent example of payment protection policies is one of a number of such cases. These regulations would certainly not do those companies any harm.

The Minister then talked about the action plan on business and human rights, and the requirement to report. I think I am right in recalling that the Foreign and Commonwealth Office are supposed to be publishing a document soon on the UN Ruggie principles. Will this legislation encompass those principles?

I welcome the section on gender reporting, especially on board members, although not on that alone. It is important that we see how much progress has or has not been made. In the current climate, if we are serious about controlling greenhouse gas emissions, that is perfectly reasonable as well. An area that interests me, which I would not mind seeing in an annual report, is—

The noble Lord talked about gender reporting on boards. I understand that and am in favour of it. However, he has only to look at the list of the directors at the front of the annual report to see who are men and who are women and to draw his own conclusion. We do not have to have a section on gender reporting. The information is all there and people can gather it together.

I am sure it will be there, but the report does not actually say what the company’s policy is on gender balance on its board. That is of interest to stakeholders and investors. I agree with the noble Lord that there is a balance to be struck but I am with the Government on this one.

As I was saying, one area that interests me and which I would not mind seeing in annual reports—it might be there already, buried away—is the amount of training that companies provide and the number of apprenticeships that they take on. That is another interesting signal of their attitudes towards their workforce and this is an area to which this Government, after all, say they are absolutely committed. We know we need a more skilled work force and more apprenticeships, so a requirement in relation to those areas in the regulations would not go amiss.

I was interested in the two areas that are being dropped. I do not understand why charitable arrangements are burdensome. I would welcome an explanation of why they are seen as such. I would not have thought they merited a huge amount of effort.

The other point on which I ask the Government to think again is the policy and payment of creditors. The Minister referred to the companies which have signed up to a prompt payment code, which is good, but there is, again, an ethical sense to this. We know how many SMEs live and die by the prompt payment policies of companies and I find it puzzling that that should be dropped.

The question of directors’ pay has, quite rightly, become the focus of a great deal of attention. Why? It is because we have seen many companies—I do not mean the noble Lord’s company; in fact, I am thinking of investing in it, if only to benefit from the offer of the beer—which have rewarded not only failure but failure and unethical activities as well. This is an important area and, by and large, I welcome the regulations. If the policy included the issue of workers’ representation on the remuneration committee, that might inject some reality; and, given the Hutton report on the ratio between the average workers’ pay and directors’ pay, a comment on that issue would not go amiss either. Some of those ratios over the past 10 or 15 years have grown enormously, unjustifiably so in many cases. Some of the examples of reductions in directors’ and chief executives’ pay are interesting. People are beginning to realise that their pay has grown unreasonably, usually on the basis that if we did not reward them we could not possibly find anyone else to do the jobs. I have always doubted that.

On the pay and the pension bonus, I take the point that the noble Lord, Lord Hodgson, made. However, that situation should be explained. I accept that there will be a variation depending on market performance but I cannot see any reason why that should not be explained. The total remuneration package that has been described includes pay, pension, bonus, performance and exit payments. We have recently seen some unbelievable examples of exit payments in the BBC, where people have walked into another job immediately and still received an additional year’s salary. We need to know the justification for that. As to the annual remuneration report and the amounts paid to each director, and pay and performance fees paid to remuneration consultants, again, if investors want to see the full picture, that is the kind of information that they require.

As to the passionate plea from the noble Lord, Lord Hodgson, of course no one wants these reports to be any longer than they need to be. I am sure that the Churchillian quote was apt and that the length of the report is inversely proportional to the amount of readership it encourages. However, I would have thought that there were ways of giving small investors a key point summary and directions to the full body of the report if they want more information. Again, this area is ripe for development.

The noble Lord, Lord Hodgson, made an interesting point about principal risks and uncertainties. It is difficult but, again, necessary, given that some companies have made some unbelievable investments that have brought them to ruin. Making sure that they are assessing risks as best they can, given that there is a general risk about the growth of the economy, is right. I was not quite sure that I fully understood the concept of the safe harbour provisions, but no doubt the Minister will be able to explain it.

The noble Lord, Lord Hodgson, made a valid point on a three-year review process. We do not want these reports to be any longer than they need to be. I am sure that over a period we will see what the Government would see as best practice and encouragement to develop it. With those thoughts, I look forward to the Minister’s response.

My Lords, I thank my noble friend Lord Hodgson and the noble Lord, Lord Young, for their contributions to this rather short, succinct debate. I am very sorry to hear that my noble friend Lord Hodgson is so pessimistic about these proposals to make improvements to reporting. He made one or two good points, and I will pick them up, but he will not be surprised to hear that I do not agree with all the points he made.

My noble friend made a good point about the size of the report. The noble Lord, Lord Young, mentioned concern about extending the report to include a strategic report given the history of reports and the example of my noble friend Lord Hodgson of a report that was 15 pages a few years ago and is now 70 pages. It will be up to companies to decide how long their reports will be and, no doubt, they will want to make them as succinct and readable as possible to include the extra requirements. I hope that will include cutting down on other areas so that the reports will be more readable.

My noble friend Lord Hodgson was concerned about the disclosure of risk. He raised an important point. The guidance on the strategic side of the report will provide guidance for businesses on deciding their key risks. He made the important point that it is quite challenging for a company to decide what risks are under its control and what risks are not, such as the economy. The guidance is designed to help with that approach but it will be up to the company to decide what it puts into its report on an annual basis. This guidance will be published for consultation and I encourage my noble friend to respond when it comes out.

My noble friend Lord Hodgson and the noble Lord, Lord Young, raised the safe harbour provision. The answer to the question, “Is there a safe harbour provision for directors?” is yes. The detail is in paragraph 17 of the schedule. It extends the safe harbour provision in Section 463 to the strategic report. The Companies Act permits directors a defence that they were not reckless, and we have made a consequential change to the law to extend this safe harbour defence to the preparation of the strategic report. I hope that that gives some comfort to my noble friend Lord Hodgson.

My noble friend Lord Hodgson raised the issue of the numbers of women being included in the report. It is fair to say that he was somewhat exercised by this. However, I hope I can reassure him, and answer a question about this matter from the noble Lord, Lord Young, by saying that this is about ensuring that businesses are managing their boards better to understand their customers, investors and staff. Evidence suggests that diverse boards are better boards and help employees who may hope to move up into management. The whole objective is to be transparent and to provide full and purposeful figures and to allow stakeholders to look at the reports. The measure is designed to be helpful to them as opposed to simply not including them.

My noble friend Lord Hodgson did not agree that the single figure disclosure would provide accurate and useful information for shareholders. I think that he was referring to the new figures that will be required. He gave the example of a director’s pension. I totally understand his point about pensions being pretty complex and that to reduce them to a single figure is challenging. As regards the example that he gave, it would be fair to say that, just as in company reports and auditing reports, you would have a codicil saying, “This figure is particularly high because of a particular aspect”, which would make the issue clear. Perhaps my noble friend was making the broader point that if you put in single figures the whole time you may obscure the bigger picture. I hope I can reassure my noble friend that companies will have guidance on this and will have to make simplicity a byword when reporting these figures. The regulations will prescribe the minimum requirements but there is nothing to stop companies providing any other material that would help shareholders better understand the information or put it into context, which is the nub of the matter. My noble friend asked whether the Government would undertake to review the regulations and their effects. The noble Lord, Lord Young, also asked about reviewing. The Government have committed to review the regulations in 2017, which is not too far off, so I hope that gives some comfort.

The noble Lord, Lord Young, asked whether the strategic report would include a company’s ethics policy, which is an interesting point. The annual report will promote discussion at the annual general meeting on the ethics of the company’s business practice, so I hope that reassures the noble Lord. He also raised an interesting point about charitable donations and asked why we were planning to cut the figures relating to those donations. The format of the charitable donations disclosure required companies to disclose the name of the recipient, the amount and the true purpose. For those companies which make a lot of donations this was becoming a burdensome requirement. The total figure is still included in the accounts but the objective of this move is to leave out figures that are becoming somewhat meaningless and rather burdensome.

The noble Lord asked whether these measures had any tax consequences. There are no direct consequences and the tax transparent status of partnerships is unaffected. The changes that we are proposing do not amend the tax law. The noble Lord also asked about pay ratios and, specifically, why we did not require companies to report on the pay ratio between directors and the average worker, which is a fair point. Companies will have to say more about how the remuneration committee has taken into account employee pay and publish the percentage increase in the pay of the chief executive and that of the workforce. However, disclosure of pay ratios has its limitations and could provide misleading information. For example, a company with a large number of low-paid employees would have a big ratio but a company that had outsourced such employees, which might be less socially responsible, will none the less have a better ratio for entirely artificial reasons.

The noble Lord, Lord Young, asked whether apprenticeships could be covered in the report. Indeed, the company can include in it additional useful material. Where a company has several apprentices, we hope that it will inform shareholders of that and shout it from the rafters.

Training, I would argue, comes under human resources policy. Again, it would be up to companies to decide whether they want to include specific training aspects. There is no obligation to do so, but they are wise to do so if it is going to materially benefit shareholders.

The noble Lord, Lord Young, asked why payment to creditors was omitted. The disclosure required companies to make a statement as to how they paid their creditors. Most companies, even rogue traders, stated that they paid their creditors on time. So we feel that the work on the prompt payment code, to which I alluded in my speech, will provide a better response.

The noble Lord also asked why there was a request to state the principal risk, which was a point that I made earlier in response to a question from my noble friend Lord Hodgson. It implements the terms of the EU accounting directive. That was a separate and extra point that I wanted to make.

I hope that I have answered all questions raised. If not, I shall be more than happy to write to noble Lords.

I asked about the effect of the action plan and the requirement to report on business and human rights, and whether it had embraced or taken into account the UN Ruggie principles.

Indeed, the noble Lord did ask that question. The human rights reporting requirement is broadly worded deliberately. However, it was inspired by the words of Professor Ruggie, which may be of some comfort to him. The FRC will provide guidance on how this may work.

Motion agreed.

Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

Relevant document: 4th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Regulatory Enforcement and Sanctions Act 2008 (Amendment of Schedule 3) Order 2013

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Regulatory Enforcement and Sanctions Act 2008 (Amendment of Schedule 3) Order 2013.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments

I beg to move that the order be considered by the Committee. Primary authority is a statutory scheme, which was launched in 2009. Under the scheme, businesses can form a partnership with a single local authority, the primary authority. This gives the business a single point of contact to help it to comply with regulation. There are currently 785 businesses and 104 local authorities in partnerships covering more than 64,000 premises. They provide support on complying with many regulations, including regulations on health and safety, age-restricted sales and trading standards. The purpose of the order is to extend the primary authority scheme to cover additional regulations not currently within it. It will enable businesses to benefit from primary authority in relation to three additional regulations: first, Part 1 of the Housing Act 2004; secondly, the Sunbeds (Regulation) Act 2010; and, thirdly, the Single Use Carrier Bags Charge (Wales) Regulations 2010.

Reducing regulatory burdens on business is important for growth. It is essential that businesses are able to comply with regulations efficiently. In their responses to the consultation on these proposals, businesses told us that they need reliable advice and confidence that their approach to compliance will be treated consistently. We know that businesses value primary authority. Not only have they told us so in consultation but recent evaluation showed that more than 90% of business respondents would recommend primary authority to others. That is why the Government are committed to ensuring that as many businesses as possible can share in the benefits of it and that the scheme covers a wide range of regulation.

The savings are not for business alone. By reducing duplication in the enforcement of these regulations, primary authority saves time for local authorities, too. It allows them to use their time better to target rogue traders and help businesses to deal with the most severe risks. Moreover, local authorities that choose to become primary authorities can recover the costs from the business.

Lastly, but very importantly, primary authority increases protection for consumers. The majority of UK businesses want to protect their customers and follow the law, but they need advice that they can rely on and need to know that the law will be applied consistently. This enables them to invest in compliance—for example, by putting policies in place or by training staff.

We have opened up eligibility for primary authority to many more businesses through the Enterprise and Regulatory Reform Act 2013. From October, this will enable businesses that share a “common approach to compliance”, such as trade associations and franchises, to enter primary authority partnerships. This order strengthens primary authority further. It will allow businesses to access primary authority for additional areas of regulation. I shall now discuss these extensions in more detail.

First, Part 1 of the Housing Act 2004 is a crucially important piece of regulation for improving the standards of the private rental sector in this country. Let me provide an example of the benefits that primary authority can bring to this area. A landlord may have received conflicting advice from two local authorities on how best to fireproof his properties. By obtaining appropriate advice from a primary authority, he will have the confidence to spend money on installing new fire doors, knowing that they are suitable. The Government have considered the detailed consultation responses on the inclusion of Part 1 of the Housing Act. Lettings businesses and some local authorities were in favour of the extension but many local authorities had reservations. We have worked closely with housing authorities to ensure that there will be no unintended consequences. We are confident that the intention of the legislation to provide risk-based protections will be supported by primary authority but we will continue to monitor its application. The Government believe that the benefits of the primary authority scheme should be extended to the private rental sector. Primary authority will provide an avenue for advice that gives certainty to landlords, thereby giving them the confidence to invest in properties. As one local authority commented, the extension,

“would give better consistency and help with raising standards amongst private landlords”.

I turn to the second extension, which is to include the Sunbeds (Regulation) Act 2010. Bringing this law within the scope of primary authority will mean that if a leisure company wants to offer sunbeds for use, it can receive advice about how best to ensure that these are not used by children. Moreover, a business unsure about the additional legislation in Wales, made under this Act, can gain assured advice about the health information that it needs to display. As a local authority in Wales commented:

“This would benefit businesses by fostering a consistent approach to the understanding of the proper implementation of the Act and Regulations”.

Thirdly, the final extension to primary authority which we are discussing today concerns adding Welsh regulations on single-use carrier bag charging to the scheme. This existing regulation requires businesses to charge customers in Wales for certain carrier bags. Primary authority will ensure that businesses, whether based in Wales or not, can access robust and reliable advice on complying with this Welsh legislation. For example, many businesses deliver products to customers in Wales from England. They will be able to gain advice on the requirements to keep records of the charges made to customers.

This extension is welcomed by national businesses such as Asda, which has stated that it wants,

“a common approach to such a straightforward issue that affects our sites across a number of local authorities”.

Its benefits will also be felt by smaller retailers. The Association of Convenience Stores has said:

“The ability to obtain assured advice in relation to the Welsh carrier bag levy would be beneficial for retailers and help to ensure a consistent approach to enforcement across Welsh local authorities”.

We have listened to businesses. They have told us that primary authority is valuable to them because it delivers consistency and reliable advice. They have told us that they would recommend primary authority to other businesses and that they would like these areas of legislation included within the primary authority. This order will extend the scope of primary authority, enabling businesses to access its benefits for these additional areas of legislation. It will give businesses a further tool to reduce the burden of complying with these regulations, allowing them to concentrate on growing their business. I commend this order to the Committee.

My Lords, we welcome this approach. If, as the Minister said, it reduces duplication and gives more consistency, what is not to like? I listened carefully as he went through the various areas where it would extend the application of a primary authority and I have a couple of questions. Is there any impact at all on local employment partnerships? While I welcome the fact that landlords will not get conflicting advice, I could not help thinking about the tenants. What impact will the measure have on them in terms of being assured that there will be consistent advice?

As regards bringing sunbeds into the scope of primary authority, not only children but adults often overindulge in that area. However if there is consistency, again that seems a good thing. Similarly, as regards carrier bags, anything that reduces their population—I am constantly picking them up as I walk my dog—is welcome. However, the impact will be felt mainly in Wales. The question is: when will we have this sensible legislation extended to England?

Sitting suspended for a Division in the House.

I think that I had almost reached a conclusion. I think the Minister mentioned something about monitoring, and I was going to ask whether there was a fixed review period in relation to that.

My Lords, first, I thank the noble Lord, Lord Young of Norwood Green, for his collegiate approach and for his general welcome for this statutory instrument. He raised a couple of questions. The first was whether LEPs would be impacted. I can confirm that there is no direct impact on LEPs as they operate independently from local authorities and the primary authority scheme. However, if a LEP decides that it wishes to address the issue of the burden of compliance within its area, it is free to encourage the uptake of the primary authority scheme among businesses.

The second question related to the effect on tenants of the changes that we are making to primary authority and to the landlord housing scheme. The Government believe that it is important that tenants are protected and that landlords in the private rented sector provide safe and healthy housing. Primary authority is consistent with this. By giving businesses certainty about their obligations, primary authority makes it simpler for lettings businesses to comply with any regulation. When businesses understand what is expected of them and know that it will be applied consistently, they are more likely to invest in compliance, which leads to raised protection for tenants. The noble Lord, Lord Young, asked about the fixed review period, and I can confirm that there will be a review after three years.

Finally, just before we broke to vote, the noble Lord asked whether this will protect adults as well as children using sunbeds. Primary authority advice will be available to cover the full range of protections under the Act, which creates a duty on businesses in England and Wales to ensure that no person under 18 uses or is offered the use of a sunbed on their premises. The Act also gives powers to the Secretary of State and Welsh Ministers to enact further secondary legislation in England and Wales. In 2011, Welsh Ministers introduced measures in Wales under this Act that further regulate the sale and hire of sunbeds and require the provision and display of health information and the provision of protective eyewear. This will protect both children and adults. The inclusion of the Sunbeds (Regulation) Act 2010 within the scope of primary authority will therefore cover the enforcement of these areas. I hope that that answers all the questions raised by the noble Lord, Lord Young.

There was one other thing. I was interested in carrier bag usage in Wales. Have the Government given any consideration to extending charges for carrier bag usage to England?

That is a fair question. We are not able to comment on it at present, so I will take note of the question. The UK Government have not yet reached a decision on mandatory charging for carrier bags in England. We are first monitoring the results in Wales and Northern Ireland and the outcome of the Scottish consultation on such a charge. We need clear, robust data before making any decisions. That way, we will be aware of any unintended consequences of the actions.

As the noble Lord will be aware, extending primary authority to Welsh regulations on single-use carrier bag charging affects only Wales. Therefore government policy regarding England is at present unaffected.

Motion agreed.

Committee adjourned at 6.56 pm.