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24 Jan 1996 : Column 1110

Companies Act 1985 (Miscellaneous Accounting Amendments) Regulations 1996

8 p.m.

Lord Chesham rose to move, That the draft regulations laid before the House on 16th January be approved [5th Report from the Joint Committee].

The noble Lord said: My Lords, I should like to begin by saying a little about the purpose of the draft regulations. The draft regulations in the main simplify or repeal a number of specific Companies Act accounting disclosure requirements, thereby removing provisions that have been superseded by other requirements, or are otherwise no longer warranted. The draft regulations also rectify a technical problem identified in relation to audit exemptions for "off-the-shelf" companies and correct some technical anomalies identified in the implementation of the insurance accounts directive. In addition, they include a new requirement for public limited companies and their large subsidiaries to publish their payment policies in the directors' report.

With the exception of the new requirement requiring disclosure in the directors' report of a company's payment policies--of which I will say more in due course--the draft regulations, taken as a whole, should reduce the administrative and other costs to companies in complying with Companies Act disclosure requirements.

With the exception of the new requirement for disclosure of payment policies in the directors' report, which will apply solely to public limited companies and their large subsidiaries, and those provisions relating exclusively to insurance companies, the draft regulations as a whole apply to the entirety of registered companies, regardless of size or business type. However, in practice the provisions relate mainly to the accounts of large companies, as small companies are already exempt from a number of disclosure requirements.

Turning now to the new requirement that public limited companies and their large subsidiaries disclose their payment policies in the directors' report, I should like to say a little about the background to this measure. The Government's 1994 competitiveness White Paper, Competitiveness--Helping Business to Win, announced a package of new measures to help tackle the problem of late payment of commercial debt. One of the key elements in that package was the introduction of a requirement for public limited companies to publish their payment policies in the directors' report, thereby providing suppliers and others with information about how they can be expected to be treated by such companies, and thus giving additional data on which to base decisions on, for example, supply and pricing.

In February 1995 the DTI consulted the business community on the form of the statement that directors would be required to make. The statement was to be based on whether or not the company follows any code of practice on prompt payment: companies would either disclose that they complied with such codes, including

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the proposed new British standard, or they would disclose that they complied with principles of good practice to be specified in the proposed regulations.

The majority of those responding to the consultation were in favour of this policy, although a number of respondents pressed for alternative measures to address late payment. A further round of consultation, based on the text of the draft regulations as a whole, was undertaken in October last year. The response to the new disclosure requirement was favourable, although some respondents again sought to use the consultation to argue for additional measures to combat late payment, including a statutory right to interest.

The new disclosure requirement will only apply to public limited companies and to large private companies which are subsidiaries of public limited companies. We estimate there to be approximately 11,900 public companies. The new requirement will come into force in relation to accounts for financial years ending after 24th March 1996, although the information to be provided will be in respect of the payment policy for the forthcoming year.

Requiring public limited companies to publish details of their payment policies should prove a real disincentive to poor practice. Chairmen will not want to admit publicly that their companies do not have a policy of paying on time. Furthermore, the fear of being confronted with evidence from disgruntled suppliers--who may well seek to generate adverse media comment--that their stated policies and actual practices differ, should help ensure that directors take the necessary action to make sure that they pay promptly.

Finally, I should like to reiterate the point I made earlier that all the measures contained in the draft regulations before the House today have been subject to full public consultation. The draft regulations have been widely welcomed and are seen as a positive first step in simplifying the accounting disclosure requirements of the Companies Act. I beg to move.

Moved, That the draft regulations laid before the House on 16th January be approved [5th Report from the Joint Committee].--(Lord Chesham.)

Lord Haskel: My Lords, I welcome the statutory instrument as an attempt to change the culture so we will not oppose it. However, I have two problems with it. First, I do not think it goes far enough. Secondly, will it apply to government, local authorities, government agencies and so on?

I am sure that the Minister will be aware of Francis Fukyama's new book: Trust--The Social Virtues and the Creation of Prosperity. In it he argues that social culture comes before economics and if there is no culture of trust, the transaction costs are enormous.

What has all that to do with late payments? Firms spend many years building up relationships, and paying your supplier on time is an important part of that. It is in that context that I should like to see the statutory instrument. Without that ethical context, there is no real need to pay your supplier on time. Every businessman knows that credit from suppliers is a cheap source of finance. So we certainly welcome as a contribution

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towards a cultural change the requirement to make a statement in the annual report, but I have my doubts as to whether it will help practically.

We support companies having to state their intentions, but it would also be a useful discipline to state what their practice has been during the year. That point was made in the Labour document: A New Economic Future For Britain. If the directors reported on their record of payments and the auditors checked it, not only would it be a useful discipline but also the small company receiving late payment could bring that to the attention of its customers' auditors. At least the small companies would have someone to talk to, instead of talking to the press, as the Minister suggested.

If we really want to help small businesses collect their debts, we must help them to help themselves, as the Government's White Papers on competitiveness have pointed out. For instance, in large and small firms nowadays most orders are processed by computer. The software is such that it is easy to print out orders and order confirmations. Let those orders and order confirmations state precisely the terms of payment. Of course, one effective way to get prompt payment is to give discounts and cost them into your prices.

Many years ago there was a radio programme called "Your 100 Best Tunes".

Lord Henley: It still exists.

Lord Haskel: I should have thought that the noble Lord was too young to know the programme. I remember that at the time in my office we kept a record of the hundred best reasons for not paying. If I can find it, I shall send it to the Minister. I remember clearly that Reason 76 for the customer not paying was that he did not have any cheques and he could not get any from the bank because the printer was on strike.

The DTI has a department for promoting good business practice. I hope that those practices will be promoted to small companies via business links while, at the same time, the requirements in this statutory instrument are made obligatory for large companies.

Most important is the question of payments from government, local authorities, government agencies and other customers not entirely in the private sector. In the statutory instrument or in Appendix A to the consultative document, there is a statement that the public sector must give a lead and that the Government will require all government departments and their agencies to comply with the CBI prompt payment code. Very laudable. But what happens in practice?

The Minister will have noticed that last weekend Mrs. Barbara Roche MP issued a statement pointing out that in 1994-95 £208 million was paid late by the Government to firms. The Treasury, the DSS, the ODA and National Heritage were able to say how much they had paid late. The DTI--the Minister's department--the Home Office and the Department for Education and Employment could not. Is it surprising that bills are paid late if the accounting systems in Whitehall are in chaos? Can the Minister say what the Government will do about it now?

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I can do no better than to quote the Federation of Small Businesses:


    "How can the Government say in one breath that it wants a solution to the problem of late payments, when its very own departments are guilty of major delays in their payment record? Setting an example should be paramount in Ministers' minds".

I could not have put it better myself.

I believe that that covers the main point in the statutory instrument. The remaining points are mainly technical, dealing with accounting standards for Europe. There are also some measures making good earlier omissions and minor points tidying up the accounts of insurance companies and banking companies. However, they are additional regulations. I hope that the Minister is keeping count, so that when the Government are next in deregulation mode, and we hear about how many regulations have been scrapped, the regulations in this statutory instrument today will be subtracted from the total.


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