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Lord Wedderburn of Charlton: My Lords, I have a problem with the comments of the noble and learned Lord, Lord Fraser. I hope that I may make two points. First, this board of directors should act in conformity with best practice. However, we do not know what that will be because there is a large amount of literature on the general practices of good corporate governance, which vary from time to time. If they vary from time to time, why not let the directors take the decision (when they need to) on whether there should be a chief executive, or, indeed, other executive directors? It does not seem to me right to include this in a statute before the time at which the matter has to be considered.

Secondly, I have a further problem in relation to Amendments Nos. 11 and 16. In the particular circumstances of the body we are discussing, if it is to be a private company under the terms of the 1985 Act, and if its board is to act, as boards should, in accordance with the generally accepted principles of good corporate governance, how far does the noble Lord who spoke to the amendments regard those principles as legally enforceable, and in what manner, and which kind of claimant could pursue them? Of course, the claimant can be the company, but the company we are discussing will be particularly

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controlled by its board of directors, as are many companies. Unless there is a real "bust up", those directors probably will not take legal action to enforce any of the principles of good corporate governance. Are these measures to be enforceable and, if so, in what manner, and by which kind of plaintiff? I hope that the Minister will give us an idea of what we are to be faced with.

4 p.m.

Lord Boardman: My Lords, I support the amendment moved by the noble Lord, Lord Newby. I also agree with most of what he said as regards the other amendments in this group. What was said about the chairman and the chief executive was well spoken to on this side of the House this afternoon, so I shall not repeat those comments, although I have one slight reservation. I agree with the combination of the role of the chairman and chief executive which may arise from time to time; for instance, through death, illness or absence for some other reason.

However, I am somewhat cautious about combining those roles in a statute because of an individual's personality. I know that in this case the individual has done marvellous work and has been highly praised. However, it seems wrong to me that a statute should be built around the personality of one man. I accept that from time to time the roles may need to be combined; for example, if the chairman dies or the chief executive goes off and one takes over the other's job. It may be appropriate to combine the posts as a matter of necessity in those circumstances rather than fitting them to the personality of a particular individual, however qualified and competent he may be.

Lord Burns: My Lords, I support the general tone adopted by the noble and learned Lord, Lord Fraser of Carmyllie, and support both Amendments Nos. 11 and 16. It is not surprising that he and I see eye to eye on this matter to some degree. We have been discussing it for the better part of 12 months. Indeed, I believe it is more than 12 months ago that we first discussed this measure in the Joint Committee. My views have not changed a great deal over that period. The FSA is a powerful organisation which needs good governance. I believe that it should reflect best private sector practice. It is right, and we are content, that Howard Davies should be the executive chairman at this stage, but we argued that in the longer term the job should be divided.

I have some problems with the case which has been put forward. I do not believe it is right that we should imply now that the position should automatically change once Howard Davies moves on to other exciting challenges. That puts him under pressure and implies that his position is in some sense offside. Nor do I have much sympathy with the view that there should always be one person. That is an argument which Howard Davies comes quite close to arguing himself. If we had wanted a different style of organisation we should have had a different vehicle from the one chosen in relation to the FSA.

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After a lot of discussion, I believe that the spirit is very much captured by Amendments Nos. 11 and 16. Basically, they say that we want good corporate governance. That allows for the posts to be combined, but there is a requirement that the case should be explained if that is to be done.

I see one role for the Select Committee which scrutinises the FSA. It should carry out a thorough check on whether the FSA is working in a way consistent with the code. It is a role played by outside organisations as regards private sector companies; they issue reports on the extent to which companies are compliant with the code. After a great deal of discussion about this issue, it seems we have found a way that does the trick. I believe that it should satisfy people on both sides of the House.

I would be very hesitant to support amendments which legislated for a particular combination of posts, but I like the idea that one can describe it as setting the challenge of good corporate governance in terms of its practices. We build in an expectation that that should happen and the Select Committee which is eventually appointed to supervise the FSA should have the job of checking that that is being done.

Lord Saatchi: My Lords, before I address these amendments, perhaps I may thank the Minister very much for the very helpful way in which he has dealt with the timing and the tabling of amendments and with the groupings for Report stage.

As the noble Lord, Lord Newby, and many of my noble friends have said, the basic concern of the movers of this amendment is that the FSA is a unique body which is very powerful indeed. The theme of these amendments, and many of our other proposed amendments to the Bill, resolves itself into a single question: who guards the guardians?

In Committee we proposed that the governance model for the FSA should be the combined code of corporate governance, the successor model to the Cadbury, Hampel and Greenbury codes. Therefore, in Committee we had a long debate as to whether or not a key guardian figure might be the chairman of the FSA in accordance with the combined code. At the time the Minister said no. We also asked whether we might spell out in the Bill that the guardian role might be performed by the non-executive directors of the FSA, again in accordance with the combined code. Again the Minister said no.

The reason for the Government's reluctance to contemplate splitting the roles of chairman and chief executive at the top of the FSA and what is so puzzling to practitioners in the industry is that the FSA is the body which supervises the very companies which themselves are obliged to supervise the application of the combined code to their clients. So reasonable people are mystified as to why the rules of governance that they are expected to apply to their clients should not be applied to the body that regulates them.

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In Committee the Government justified their objections to the splitting of the role of the chairman and the chief executive by saying that the analogy with the Cadbury approach was irrelevant. But the substance of that approach, and now the combined code, concerns the good governance of organisations. There is a great deal that we can learn from that.

It recognises that, where the exercise of power is concerned, it is vital for there to be appropriate checks and balances. As many of my noble friends and other noble Lords have said, the FSA will have enormous powers. If this House has a role to play in relation to this legislation, it surely is to ensure that those powers are circumscribed with appropriate checks and balances. I hope that noble Lords will not mind me quoting the combined code so that we are all very clear what we are discussing. The principles of good corporate governance in the combined code state that,

    "There are two key tasks at the top of every public company--the running of the board and the executive responsibility for the running of the business. There should be a clear division of responsibilities which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision".

I know that the FSA is not a public company, but the good sense of the principle is clear: that powerful organisations need a balance of power and authority at the top. As the noble Lord, Lord Newby, said, that was also the view of Don Cruickshank in his report on competition in the UK banking industry which he was asked to produce for the Chancellor of the Exchequer. He makes the same recommendation.

As the noble Lord, Lord Newby, and many of my noble friends have done on other occasions, I stress that it is not the present incumbent at the top of the FSA whom we fear; it is his heirs and successors, and the tendency of all regulatory bodies to suffer from regulatory creep. Perhaps I may give your Lordships one example of that. The original Bill that arrived in this House for Second Reading had 268 pages. The current Bill that we have in front of us has 283 pages. I do not know where the amendments come from or who thinks of them, but that is a good example of regulatory creep.

As the noble Lord, Lord Burns, said, in this concern we are echoing the thoughts of the Joint Committee and its recommendations. We would like to see a clearly accepted division of responsibilities at the top of the FSA to help to ensure a balance of power. If the present incumbent is listening to, watching the debate, or perhaps may read it in Hansard, I should like him to know that I and all my noble friends have great respect for him. However, I must reiterate what many of my noble friends have also said; namely, that it must be the object of this Chamber to look ahead and to prepare legislation to underpin the working of the FSA for 10 or 20 years, certainly well beyond the term of office of any individual.

Perhaps I may now come to what I believe is the heart of the Government's objections to splitting the roles, as I have understood them. The Government say that the FSA is not a private company and that is why

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they say that it is not appropriate to apply the Cadbury or combined code guidelines of corporate governance to the FSA. That is the heart of their argument. The Government said that they are,

    "mindful of the fact that parallels with other models of corporate governance are not exact".

What they mean by that is that the FSA is not a private company and does not have shareholders. It is true that in any normal private company the accountability of those in power--in others words, the executive directors--is achieved because the board of directors reports to the shareholders who can remove them. As the Government say in this argument, the FSA has no shareholders. Therefore the question is: how is accountability of the executive to be achieved, and to whom?

Under our proposals, the City--those regulated by it and those outside it--would have in the chairman someone whom it could approach with its anxieties, someone who, if not instantly responsible for the issues, could take them up with the chief executive, enabling the whole system to be seen to work better.

The BBC is a good example of how this system works in practice, as we discussed on an earlier occasion. If the BBC was to be accused of political bias of a serious nature, or of some gross invasion of privacy, or of not meeting its programming obligations in a serious way, it would be clear that someone other than the executive responsible for the allegedly offending decisions would become the court of appeal. That person is the chairman of the BBC. The structure works perfectly well. We all believe that the BBC is an icon of an organisation that has performed a great public service.

I ask noble Lords to bear in mind that IMRO, the SIB and the SFA--three of the FSA's most important regulatory predecessors--all operated on a system which split the functions of the chairman and the chief executive.

4.15 p.m.

Lord McIntosh of Haringey: My Lords, I recognise the strength of feeling expressed in the debate. I hope that all noble Lords will recognise that different views can be sincerely held on these issues. I believe that the differences are narrower than they might have appeared when we debated the matter in Committee.

These amendments cover different aspects of the FSA's governance, and some of them take us over ground discussed in Committee. I shall deal with those amendments first and get them out of the way before I move on to the amendments which approach the issue from a different angle. My noble friend Lord Borrie noted the difference between amendments which are a repetition of previous ones and those which are genuinely new.

The first group of amendments that we have seen before--Amendments Nos. 5, 6, 7, 9 and 10--relate to the role of the chairman and chief executive. I recognise that the combining of the role of the chairman and chief executive is against the recommendations of the Cadbury committee. Several

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reports have been quoted by a number of noble Lords. I shall continue to quote them, I hope without too much selectivity. Paragraph 4.9 of the Cadbury committee report states:

    "Given the importance and particular nature of the chairman's role, it should in principle be separate from that of the chief executive".

That conclusion was endorsed by the Committee on Corporate Governance.

But the Committee on Corporate Governance was keen to emphasise the need for flexibility and common sense in applying these principles. In particular, paragraph 3.17 of its final report states that,

    "where the roles are combined, the onus should be on the Board to explain and justify the fact".

The FSA already does that in complying with the combined code. It is stated explicitly on page 107 of its annual report.

My first point is well made by the Committee on Corporate Governance. It notes in paragraph 1.14 that strict adherence to recommendations of reports,

    "can be seized on as an easier option than the diligent pursuit of corporate governance objectives".

The success of the FSA should be judged by the extent to which it meets its four regulatory objectives. The creation of a single regulator with these clear and statutory objectives has been widely welcomed. The real question, it appears to me, is what governance structure will enable the FSA to best meet these objectives.

My second point is that the FSA is different from a typical private company. That is not to say that we have dismissed Cadbury as irrelevant, as I have said and as I shall continue to say. But the FSA differs from a private company in three crucial respects. First, as noted by the noble Lords, Lord Alexander and Lord Saatchi, it has no shareholders; secondly, its accountability is to Treasury Ministers; and, thirdly, it is required to take important decisions very rapidly. It is not alone in having to take decisions very rapidly, but a key difference is the potentially systemic consequences of the FSA's decisions.

Let us look at the issue practically. What governance structure best meets the FSA's objectives and reflects its unique circumstances? We think that the combined chairman and chief executive is the best model. It gives clarity over who is accountable for meeting the objectives; the line of accountability is clear--from the chairman of the FSA to Treasury Ministers to Parliament--and the appointment and removal of the chairman is by the Treasury.

Certainly, witnesses to the Burns committee supported the clarity given by the combined role. For example, the director-general of the London Investment Banking Association said:

    "We are happy with the board structure arrangements that the Government has chosen".

Another witness, the group chief executive of a major bank, said:

    "The separation of Chairman and Chief Executive, particularly if we are talking about a non-executive Chairman of the FSA, will complicate the issue of accountability rather than clarify it. The important thing is the totality of the checks and balances at work".

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We believe that the combined role is appropriate where there are no shareholders' interests to protect. Paragraph 4.7 of the Cadbury report states that the role of the chairman includes the need to,

    "alert [board members] to their obligations to their shareholders".

As I said in Committee--probably at too great a length--it is significant that virtually all the other major financial regulators--including those of the United States, France and Japan--are represented by full-time executive board chairmen or their equivalents. It is also the role played by other UK regulators, such as the Director-General of Fair Trading, the Director-General of Telecommunications and the Rail Regulator.

The final key aspect in which the FSA differs from other companies is the need for speed in decision making. In Committee, the noble Lord, Lord Newby, gave an example of the Governor of the Bank of England, the Chancellor and the chairman of the FSA being in a room together, and said that if there were a split role at the top of the FSA the chairman would be perceived to be weak. He said:

    "There are several ways around that, one of which is that both the chairman and the chief executive could attend the meeting and the other two could take seconds, too".--[Official Report, 16/3/00; col. 1688.]

That does not make terribly good sense to me. It is not the ideal organisation where there might be--as indeed there would be under these circumstances--a great deal of urgency.

In terms of the discussions we had in Committee, we believe that a combined chairman and chief executive is the best structure for meeting the FSA's objectives, for clear accountability to Treasury Ministers and for speed of decision making.

But we also fully accept that safeguards are needed. We agree with the recommendation by the Committee on Corporate Governance, at paragraph 3.18, that,

    "where the roles of Chairman and Chief Executive were combined, there should be a strong and independent element on the Board, with a recognised senior member",

and that, in general (paragraph A.2.1 of the combined code):

    "There should be a strong and independent non-executive element on the Board".

The noble Lord, Lord Newby, quoted that part of the code.

Furthermore, paragraph A.3.1. of the code states:

    "Non-executive Directors should comprise not less than one-third of the Board".

We have more than adhered to that requirement. A majority of the members of the governing body must be non-executives. There must be a senior non-executive; and we have made clear to Stewart Boyd, the deputy chairman of the FSA, the important role that we expect him to play on the board, which, indeed, he is playing.

I hope that I have done as the combined code recommends and publicly justified our decision to combine the posts. I am therefore unable to accept the principle behind Amendment No. 5, which would require the roles to be split.

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I turn now to the remaining amendments in the group which seem to represent new lines of thought, starting with Amendment No. 1. The effect of this amendment would be to specify on the face of the Bill that the FSA is a private company formed under the Companies Act 1985. Although the FSA was in fact, as the SIB, formed and registered under the Companies Acts 1948 to 1981--not under the 1985 Act--I agree that the best structure for the FSA is that of a private company limited by guarantee. The FSA is such a company and it continues to be such a company, as it was before it changed its name. This has been important in allowing the FSA to make effective preparations for assuming its new statutory functions.

The main effect of Amendments Nos. 3 and 4 would be to specify that the authority's board of directors would be called the "governing body". My understanding is that any other interpretation would be unlikely. While I understand the principle behind the amendments, I believe, with respect, that the Bill already has the desired effect. If more certainty is needed on that point, we shall continue to make inquiries between now and Third Reading.

I turn finally to Amendments Nos. 8, 11 and 16 which would amend paragraph 2 of Schedule 1 which sets out some requirements of the FSA's constitution. Amendment No. 8 would require the Treasury, in exercising its power to appoint and dismiss members of the governing body, and Amendment No. 11, the FSA, in the conduct of its corporate affairs, to have regard to generally accepted principles of good corporate governance. Amendment No. 16 would require the authority to act in conformity with provisions of the combined code prepared by the Committee on Corporate Governance.

Let me say at the outset that I understand the intention behind these amendments. The FSA should behave in line with accepted practice in performing those governance functions which are equivalent to those recommended for public companies. I should add though, in respect of Amendment No. 8, that the Treasury has different lines of accountability, to Ministers and hence to Parliament, and that good practice is already adopted in respect of appointments to the governing body: all directors have three-year contracts, apart from the chairman who has a five-year contract. It is our intention in future to recruit all non-executive directors using Nolan procedures; some already have been. Therefore, we are unable to accept that amendment.

Amendments Nos. 11 and 16, which were singled out by the noble Lord, Lord Burns, are intended to have the effect that the FSA should have regard to the provisions of the combined code. As the FSA does not have shareholders in the normal sense, it is not reasonable to expect it to have regard to every aspect of generally accepted principles. We have a certain amount of difficulty with Amendment No. 16, which requires the FSA to act in conformity with the combined code. Having said that, some aspects of the code are relevant: in particular the requirements to

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ensure that there is a strong and independent non-executive element on the board, and to justify any deviation from the model of separate chairman and chief executive. The FSA already fully recognises the importance of the combined code. I have already referred to its annual report.

In respect of the corporate status of the FSA, the name and role of the governing body, and the principles of corporate governance, I have listened carefully to the concerns of noble Lords. 1 am glad to say that we support the principle behind Amendments Nos. 1, 4, 11 and 16. Noble Lords have certainly helped us to take forward the debate on governance in a very helpful way. The Bill already gives effect to the principles underlying Amendments Nos. 1 and 4: that the FSA should continue to be a company constituted under the Companies Acts and that its governing body must be a Companies Act board of directors. I undertake to review the relevant part of Schedule 1 in the light of Amendments Nos. 11 and 16 and to return at Third Reading with any amendments needed to achieve the effect which noble Lords sought to achieve in tabling them. On that basis, I would ask the noble Lord to withdraw the amendment.

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