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Lord Elton: The detail is disturbing, because there is a well established principle in law expressed as inclusio unius est exclusio alterius. If we mention various members' tasks but not others, the assumption is that

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only those mentioned are to be referred to. Therefore, if the schedule is to be as prescriptive as it is, there should be a paragraph saying "Such further functions as may be", and so on, to permit other things to be done, because clearly there are other things to be done by the non-executive directors that are not mentioned in the Bill.

I hope that the Minister will enlighten us further about the policy on appointments. Whatever its demerits, one of the merits of the self-regulation system was that it brought out of the industry people who were very well steeped in its practices and understood it well. That process has now been interrupted. I wonder what steps the Government intend to take, through the Treasury, to see that those appointed to the board between them cover the very wide range of expertise that the very wide range of the powers of the board require it to have.

6.45 p.m.

Lord Kingsland: I rise to speak to my Amendments Nos. 22 to 24. They are precisely on the point raised by my noble and learned friend Lord Fraser of Carmyllie and my noble friend Lord Stewartby.

Sub-paragraphs (a), (b) and (c) of paragraph 4(3) all stipulate rather minor activities of the committee. They are important to certain individuals, but in terms of the overall responsibilities they are in a minor key. That is why Amendment No. 22 stipulates that an additional sub-paragraph (d) should be added, requiring the non-executive directors to keep


    "under review the question of whether in discharging its general functions the Authority is acting in the way required by sections 2(1) and 2(3)",

which define the FSA's broad statutory duties. That would remove any doubt that the non-executive directors were indeed able to range over the authority's full responsibilities.

Furthermore, with regard to my noble and learned friend's observations about paragraph 5, Amendments Nos. 23 and 24 seek to remove any doubt. They make it clear, I hope, that the FSA may discharge all its functions acting through its governing body. However, it is recognised that the FSA will want to make arrangements for many of its functions to be discharged by committees, sub-committees, officers and members of staff of the FSA. Although arguably it is implied that the FSA can discharge all its functions by acting through its governing body, the amendments make the position absolutely clear.

Lord McIntosh of Haringey: I am grateful to noble Lords for the way in which they have introduced the amendments. Perhaps I may say a few words in general about the non-executive members of the FSA's board before I turn to the specific amendments.

First, I apologise to the Committee for having said in response to an earlier amendment that the non-executive directors are not paid. They are in fact paid a fee. That fits in with my being able to say that in the Government's view the non-executives have a key role to play in the governance of the FSA.

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The fundamental point here is that the role of the non-executive committee is set out in paragraph 4. The non-executive committee is made up of the non-executive directors and not the executive directors. They review whether the FSA is using its resources in the most efficient and economic way; review its internal financial controls; and determine the remuneration of the chairman and executive members of the board. In that case I acknowledge that they are largely housekeeping functions.

But, of course, the role of the non-executive directors is not confined to their role as members of the non-executive committee. They are also members of the board and they have all the functions of full members of the board, which do not need to be provided for in the Bill, because one does not specify every single thing. We believe that the amendments specify a little too much. For example, making rules, which is one of the fundamental legislative activities of the FSA, is the responsibility of the whole board, including the executive and non-executive directors.

Before I turn to the individual amendments, a further general point is the need for the FSA to decide for itself how it should organise itself to meet its objectives. Schedule 1 sets out a framework. We do not believe that it is for the Bill to prescribe the FSA's governance too precisely beyond ensuring that proper structures and procedures are in place to ensure accountability.

These amendments are intended to and would achieve a number of differences from the Bill as currently drafted so I want to explain why, in our view, these amendments would either be too prescriptive, which is the normal case, or would make little difference to the Bill as currently drafted.

I turn first to Amendment No. 15, which was spoken to by the noble Lord, Lord Sharman. The two main effects of Amendment No. 15 would be, first, to limit the term of the non-executive members of the board to four years. That is a good illustration of my point about not being over-prescriptive. The existence and duration of such limits is for the Treasury to decide. The power of the Treasury to decide removes the temptation, however unlikely, that the executive members might weaken the non-executives by offering only short-term contracts.

The second effect would be to make a function of the non-executives,


    "the question of whether the Authority is discharging its functions in accordance with the general duties under this Act".

That should be the responsibility of the board as a whole, executives and non-executives, and not just the non-executives.

The main effect of Amendment No. 14 would be that the Treasury, rather than the FSA, would have to secure that a majority of the members of the FSA's governing body were non-executive. I appreciate the thinking behind it but I do not believe, with respect, that it would add very much. The Bill is quite clear in specifying that the FSA must have a majority of non-executive members of its governing body. The

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suggestion that the Treasury would somehow inhibit that and make it impossible to do that is a little fanciful.

Lord Elton: The Bill as drafted is telling the authority to do something that it does not have the power to do.

Lord McIntosh of Haringey: I concede that it could be interpreted in that way, and if it could be interpreted in that way it ought not to be because it is certainly the intention of the Bill to ensure that that happens.

Lord Elton: Will the noble Lord think a little further about that because I believe that there is only one way of interpreting it, in fact?

Lord McIntosh of Haringey: I thought that I had indicated that I would think about it further. I shall come back to the noble Lord on that. If amendments are required, then we must make those amendments. But I am sure that there is some devilishly clever reason why the authority has the ability to do what the Bill says it is going to do.

As I said, the Bill is quite clear in specifying that the authority must have a majority and, indeed, it has a majority of non-executives at the moment.

A further effect of Amendment No. 14 would be to specify that the non-executive committee, specified in paragraph 3(b) of Schedule 1, would discharge the functions of the non-executive committee specified in paragraph 4. Paragraph 3(1)(b) refers to functions conferred on the non-executive committee under Schedule 1 and paragraph 4 is, of course, part of Schedule 1 and is therefore covered.

The next point of difference would be to specify, as Amendment No. 18 does, that the FSA board may also set up and maintain a committee comprised mainly or solely of non-executive members for purposes other than those specified in paragraph 4. Again, there is nothing in the Bill to make that impossible. We do not see any reason to change it. As has been said, paragraph 5(1) allows the FSA's functions to be discharged inter alia by a committee. There is nothing to stop such a committee comprising non-executives and, indeed, only non-executives.

Another impact of Amendment No. 18 would be for the authority to be required to make arrangements, at its cost, for non-executive members to obtain independent legal advice in relation to their responsibilities and the performance of their duties. I appreciate that that is a recommendation both of the Cadbury report--and it is all we have--and of the Combined Code, Principles of Good Governance and Code of Best Practice.

We have no objection to that principle but we believe that it is something for the non-executives to decide between themselves rather than it being prescribed in legislation. I should add that the FSA is quite content in principle to finance independent legal

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advice to the non-executive members of the FSA board. Indeed, I can go further and report that the FSA board resolved on 15th April 1999 that:


    "Any director who requires professional advice on a matter relating exclusively to the duties of a director may ... have direct access to the Authority's professional advisers; and, if the director considers it essential to receive independent professional advice on such a matter, this may be obtained at the Authority's expense within reasonable financial limits after reference to the Chairman or the Deputy Chairman".

Lord Jenkin of Roding: I apologise for not being here at the beginning of the debate. What the Minister has read out seem to me to be fairly limited circumstances. Let us suppose--and I hasten to say that I do not believe that it has ever arisen in relation to anything in which I have been involved--that a director says to his colleagues, "Look, I do not think we have power to do that. I do not think that the authority has power to do that", and that is then challenged by the executives who produce their legal advice, and the non-executive director then says, "Well, I believe that we should have independent legal advice". That is nothing to do with his functions as a director. He is challenging the legal advice that has been given to the authority.

I had always understood that that recommendation of the Cadbury committee sought to address the problem where one or more directors of the board felt that they were being asked to do something which is not proper and who felt that they should have independent advice on the matter. That is much wider than the phrase the Minister read out.


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