The point must surely be that there ought to be a way round this that would accept the overall architecture of the structure of the orphan fees arrangement but would not penalise or tax those who have to operate it

11 Mar 2013 : Column 48

for the benefit of the public good. We have already had some suggestions that would perhaps include something to do with digital photography, which will always be a difficulty in this area. That might be a step too far. However, there are other ideas around, such as that the escrow account might be not returned to the Crown but made available for cultural work or, more particularly, returned to the original institution if the money is not claimed by a bone fide rights holder.

There might be a case for trying a pilot scheme, which would allow us to test out a number of options. Whatever there is, there is certainly a willingness on our side to see if we can get this right. This scheme is a good scheme. It is one that we on this side want to support, but we find it very difficult to see the right way forward if the Government insist on the present wording of the Bill.

Viscount Younger of Leckie: My Lords, I begin by thanking the noble Lord, Lord Howarth, for his amendment. I do not underestimate the strength of his views on this particular issue and the remuneration for orphan works. I have listened very carefully today to his argument. As he well knows, I listened carefully in Grand Committee and, indeed, outside the Chamber to his views, which are well known.

It is one of the core principles of the Government’s proposals that remuneration is payable for the use of an orphan work. Making payment discretionary would risk undercutting the market. It would also risk rights holders not receiving the remuneration that they would otherwise be due. Therefore, to avoid unfair competition, it should not be cheaper to use an orphan work than a non-orphan work. Where cultural institutions are acting commercially, it seems only fair that they do not receive preferential treatment to other parties licensing in the market.

I can assure the noble Lord that in setting the tariff of remuneration the Government will ensure that, as far as possible, it reflects the appropriate tariff for the same type of use of a similar non-orphan work. Where an orphan work is not being used commercially the licence fee will reflect that. In such cases, the fee could be minimal. My officials are consulting the competition authorities about how tariffs are determined.

I will address a number of questions raised by noble Lords, in particular the noble Lord, Lord Howarth. First, he suggested that excluding digital photographs from the orphan works scheme might be a possibility. A stakeholder working group will be considering the possibility, at least initially, of excluding from the scheme photographs without an analogue context—so photographs merely taken from the internet would not qualify for an orphan works licence.

The noble Lord, Lord Howarth, suggested removing the principle of upfront payment and his views were very clear on that basis. We cannot, however, expect cultural institutions to ride over the rights of creators even in the interests of the public good. Of course we hope that there will not be returning rights holders. We hope that diligent search will identify any such people. However, the principle of upfront payment is an important one. Abandoning the principle of upfront payment is a guarantee to creators that even if their

11 Mar 2013 : Column 49

works are missed in the search, they will not be deprived of an income. The fact that rights holders may be content to allow their works to be used is not a reason for trying to reduce their legal rights. In many cases, the payments may be minimal, indeed nominal.

The noble Lord, Lord Howarth, also raised unclaimed licence fees—an issue alluded to by the noble Earl, Lord Erroll. The authorising body will hold unclaimed licence fees in an escrow account. Unclaimed fees could be used to subsidise the cost of running the orphan works scheme, or to pay for preservation costs in public institutions or industry training. There will be further consideration of these options with the input of stakeholders.

The noble Lord, Lord Howarth, raised the issue of a renewable term and the fact that he was not in favour of it. To allow for business certainty, there will need to be some limit on how long an orphan work can be used before a new authorisation would be required. Any returning rights holder would receive remuneration for this period of time and would be able to stop further use at the end of the period if they so wished. The metrics for determining the durations of licences have yet to be decided. In some cases, it might be a period of time; in others, it might be something else such as a print run. Therefore, there will be further consideration of how charges are determined but licence fees will be appropriate to the type of work and use proposed. I hope that, with those reassurances, the noble Lord will not press his amendment.

Lord Howarth of Newport: My Lords, the novelist Edith Wharton has a character in one of her early stories, a woman novelist, who discusses with her former lover what should be done with their love letters. She says:

“A keen sense of copyright is my nearest approach to an emotion”.

Noble Lords may be feeling rather similar by this stage of the proceedings. I am grateful to all noble Lords who have spoken in the debate—my noble friends Lady Blackstone, Lord Howie of Troon and Lord Stevenson of Balmacara, as well as the noble Earl, Lord Erroll—for their very helpful contributions.

5.30 pm

I am very disappointed indeed with the Minister’s reply. I have appreciated his willingness to meet me formally and informally, and I am sure that he understands the arguments that I am putting forward. However, what is frustrating is that in my speech I anticipated each argument that he put forward. There is no reason to suppose that orphan works would undercut the market, whatever the market may be, for whatever apparently comparable material. He did not illustrate how that might work, and I find it hard to imagine why that should be the case. He said that the tariff needs to be equivalent, but we are talking about a multiplicity of different sorts of material. It is very hard to see how a scale of tariff can be used to match things that come up as orphan works with things that are constantly appearing anew as commercial copyright material. He said that the unclaimed fees could be used for several purposes. No doubt they would be

11 Mar 2013 : Column 50

good purposes, and it is comforting to an extent that they are not to disappear into the maw of the Treasury, or of the general Exchequer, but he did not deal with the point that the unclaimed fees would amass to a very large amount of money indeed, even if, as he assured us, the fee per item would be minimal, simply because of the volume of this material. I was entirely unpersuaded by his arguments.

I was also very disappointed that the Minister chose not to respond to the suggestion made by my noble friend Lord Stevenson of Balmacara that we might meet between now and Third Reading to see whether we can still achieve a meeting of minds and an amendment that satisfies the legitimate concerns of all those who are active and involved in this area. If the Minister is prepared to say, even now, that he will give a clear-cut commitment to hold meetings with a view to achieving an amendment that satisfies the interests and proper concerns of the great cultural institutions of this country, I will be happy not to press my amendment today. I give him the opportunity to make that commitment if he is willing to do so, but if he is not willing to try once more to see whether reasonable people can come to a sensible and practical agreement on this, I wish to test the opinion of the House.

5.32 pm

Division on Amendment 84AG

Contents 194; Not-Contents 214.

Amendment 84AG disagreed.

Division No.  1

CONTENTS

Adams of Craigielea, B.

Adonis, L.

Ahmed, L.

Alton of Liverpool, L.

Anderson of Swansea, L.

Bach, L.

Bakewell, B.

Bassam of Brighton, L. [Teller]

Beecham, L.

Bichard, L.

Bilimoria, L.

Bilston, L.

Birt, L.

Blackstone, B.

Blair of Boughton, L.

Blood, B.

Boateng, L.

Borrie, L.

Boyce, L.

Bradley, L.

Brooke of Alverthorpe, L.

Brookman, L.

Browne of Ladyton, L.

Campbell-Savours, L.

Carter of Coles, L.

Christopher, L.

Clancarty, E.

Clark of Windermere, L.

Clarke of Hampstead, L.

Clinton-Davis, L.

Collins of Highbury, L.

Corston, B.

Craigavon, V.

Crawley, B.

Crisp, L.

Davies of Coity, L.

Davies of Oldham, L.

Davies of Stamford, L.

Dean of Thornton-le-Fylde, B.

Dear, L.

Desai, L.

Donaghy, B.

Donoughue, L.

Drake, B.

Drayson, L.

Dubs, L.

Eatwell, L.

Elder, L.

Elystan-Morgan, L.

Erroll, E.

Evans of Temple Guiting, L.

Falconer of Thoroton, L.

Falkland, V.

Farrington of Ribbleton, B.

Fellowes, L.

Filkin, L.

Foulkes of Cumnock, L.

Gale, B.

Gibson of Market Rasen, B.

Giddens, L.

Glasman, L.

Golding, B.

11 Mar 2013 : Column 51

Goldsmith, L.

Gordon of Strathblane, L.

Goudie, B.

Gould of Potternewton, B.

Grantchester, L.

Greenway, L.

Grenfell, L.

Griffiths of Burry Port, L.

Grocott, L.

Hanworth, V.

Harries of Pentregarth, L.

Harris of Haringey, L.

Harrison, L.

Hart of Chilton, L.

Haskel, L.

Haworth, L.

Hayman, B.

Hayter of Kentish Town, B.

Healy of Primrose Hill, B.

Henig, B.

Hilton of Eggardon, B.

Hollins, B.

Howarth of Breckland, B.

Howarth of Newport, L.

Howe of Idlicote, B.

Howells of St Davids, B.

Howie of Troon, L.

Hoyle, L.

Hughes of Woodside, L.

Hunt of Kings Heath, L.

Hylton, L.

Irvine of Lairg, L.

Janvrin, L.

Jay of Ewelme, L.

Jay of Paddington, B.

Jones of Whitchurch, B.

Jones, L.

Judd, L.

Kennedy of Southwark, L.

Kerr of Kinlochard, L.

Kidron, B.

King of Bow, B.

Kinnock of Holyhead, B.

Kirkhill, L.

Layard, L.

Lea of Crondall, L.

Leitch, L.

Levy, L.

Liddle, L.

Lipsey, L.

Lister of Burtersett, B.

Listowel, E.

Lytton, E.

McAvoy, L.

McConnell of Glenscorrodale, L.

McDonagh, B.

McFall of Alcluith, L.

McIntosh of Hudnall, B.

Mackenzie of Framwellgate, L.

McKenzie of Luton, L.

Maginnis of Drumglass, L.

Martin of Springburn, L.

Massey of Darwen, B.

Mawson, L.

Maxton, L.

Mitchell, L.

Monks, L.

Morgan of Ely, B.

Morris of Handsworth, L.

Neuberger, B.

Nye, B.

O'Loan, B.

O'Neill of Bengarve, B.

O'Neill of Clackmannan, L.

Palmer, L.

Pannick, L.

Patel of Bradford, L.

Pendry, L.

Plant of Highfield, L.

Ponsonby of Shulbrede, L.

Prescott, L.

Prosser, B.

Quin, B.

Radice, L.

Ramsay of Cartvale, B.

Rea, L.

Reid of Cardowan, L.

Richard, L.

Rogers of Riverside, L.

Rooker, L.

Rosser, L.

Rowlands, L.

Royall of Blaisdon, B.

Sandwich, E.

Sawyer, L.

Sheldon, L.

Sherlock, B.

Simon, V.

Singh of Wimbledon, L.

Smith of Basildon, B.

Smith of Leigh, L.

Snape, L.

Stevenson of Balmacara, L.

Stoddart of Swindon, L.

Stone of Blackheath, L.

Symons of Vernham Dean, B.

Taylor of Blackburn, L.

Taylor of Bolton, B.

Temple-Morris, L.

Thornton, B.

Tomlinson, L.

Touhig, L.

Triesman, L.

Truscott, L.

Tunnicliffe, L. [Teller]

Turnberg, L.

Turner of Camden, B.

Uddin, B.

Wall of New Barnet, B.

Walpole, L.

Walton of Detchant, L.

Warner, L.

Warnock, B.

Warwick of Undercliffe, B.

West of Spithead, L.

Wheeler, B.

Whitaker, B.

Wilkins, B.

Wills, L.

Wood of Anfield, L.

Worthington, B.

Young of Norwood Green, L.

NOT CONTENTS

Ahmad of Wimbledon, L.

Alderdice, L.

Anelay of St Johns, B. [Teller]

Ashton of Hyde, L.

Astor of Hever, L.

Attlee, E.

Avebury, L.

Baker of Dorking, L.

Barker, B.

Bates, L.

Bell, L.

Benjamin, B.

Berridge, B.

Black of Brentwood, L.

Blencathra, L.

11 Mar 2013 : Column 52

Bonham-Carter of Yarnbury, B.

Bottomley of Nettlestone, B.

Bowness, L.

Brabazon of Tara, L.

Brittan of Spennithorne, L.

Brooke of Sutton Mandeville, L.

Brookeborough, V.

Brougham and Vaux, L.

Browne of Belmont, L.

Browning, B.

Buscombe, B.

Byford, B.

Campbell of Alloway, L.

Campbell of Surbiton, B.

Cathcart, E.

Cavendish of Furness, L.

Chalker of Wallasey, B.

Clement-Jones, L.

Colwyn, L.

Cope of Berkeley, L.

Cormack, L.

Cotter, L.

Courtown, E.

Crickhowell, L.

De Mauley, L.

Dholakia, L.

Dobbs, L.

Doocey, B.

Dykes, L.

Eaton, B.

Eccles of Moulton, B.

Eccles, V.

Edmiston, L.

Elton, L.

Emerton, B.

Empey, L.

Falkner of Margravine, B.

Faulks, L.

Fearn, L.

Feldman of Elstree, L.

Feldman, L.

Fellowes of West Stafford, L.

Fink, L.

Flight, L.

Fookes, B.

Forsyth of Drumlean, L.

Fowler, L.

Framlingham, L.

Freeman, L.

Freud, L.

Garden of Frognal, B.

Gardiner of Kimble, L.

Gardner of Parkes, B.

Garel-Jones, L.

Geddes, L.

German, L.

Glasgow, E.

Glenarthur, L.

Gold, L.

Goodlad, L.

Goschen, V.

Griffiths of Fforestfach, L.

Hamilton of Epsom, L.

Hamwee, B.

Hanham, B.

Harris of Richmond, B.

Heyhoe Flint, B.

Hill of Oareford, L.

Hodgson of Astley Abbotts, L.

Home, E.

Hooper, B.

Howard of Lympne, L.

Howe, E.

Howell of Guildford, L.

Hunt of Wirral, L.

Hurd of Westwell, L.

Hussain, L.

Hussein-Ece, B.

Inglewood, L.

James of Blackheath, L.

Jenkin of Roding, L.

Jolly, B.

Jones of Cheltenham, L.

Jopling, L.

Kakkar, L.

Kirkham, L.

Kirkwood of Kirkhope, L.

Kramer, B.

Laming, L.

Lang of Monkton, L.

Lee of Trafford, L.

Lester of Herne Hill, L.

Lexden, L.

Lindsay, E.

Lingfield, L.

Linklater of Butterstone, B.

Liverpool, E.

Loomba, L.

Lucas, L.

Luce, L.

Luke, L.

Lyell, L.

McColl of Dulwich, L.

MacGregor of Pulham Market, L.

MacLaurin of Knebworth, L.

Maclennan of Rogart, L.

McNally, L.

Maddock, B.

Marks of Henley-on-Thames, L.

Marland, L.

Marlesford, L.

Masham of Ilton, B.

Mawhinney, L.

Mayhew of Twysden, L.

Miller of Chilthorne Domer, B.

Montgomery of Alamein, V.

Montrose, D.

Morris of Bolton, B.

Naseby, L.

Nash, L.

Neville-Jones, B.

Newby, L. [Teller]

Northover, B.

Norton of Louth, L.

O'Cathain, B.

Palmer of Childs Hill, L.

Palumbo, L.

Parminter, B.

Patel, L.

Perry of Southwark, B.

Phillips of Sudbury, L.

Popat, L.

Randerson, B.

Razzall, L.

Reay, L.

Redesdale, L.

Ribeiro, L.

Ridley, V.

Risby, L.

Roberts of Llandudno, L.

Rodgers of Quarry Bank, L.

Roper, L.

Ryder of Wensum, L.

Saatchi, L.

St John of Bletso, L.

Scott of Needham Market, B.

Seccombe, B.

Selborne, E.

Selkirk of Douglas, L.

Selsdon, L.

11 Mar 2013 : Column 53

Shackleton of Belgravia, B.

Sharkey, L.

Sharp of Guildford, B.

Sharples, B.

Shaw of Northstead, L.

Sheikh, L.

Shipley, L.

Shutt of Greetland, L.

Skelmersdale, L.

Smith of Clifton, L.

Spicer, L.

Stedman-Scott, B.

Stevens of Ludgate, L.

Stewartby, L.

Stoneham of Droxford, L.

Storey, L.

Stowell of Beeston, B.

Strasburger, L.

Strathclyde, L.

Taverne, L.

Taylor of Holbeach, L.

Taylor of Warwick, L.

Teverson, L.

Thomas of Gresford, L.

Thomas of Winchester, B.

Tope, L.

Trefgarne, L.

Trimble, L.

True, L.

Tugendhat, L.

Tyler of Enfield, B.

Tyler, L.

Ullswater, V.

Verma, B.

Waddington, L.

Wade of Chorlton, L.

Wakeham, L.

Wallace of Saltaire, L.

Walmsley, B.

Warsi, B.

Wasserman, L.

Watson of Richmond, L.

Wei, L.

Wheatcroft, B.

Wilcox, B.

Williams of Crosby, B.

Willis of Knaresborough, L.

Wilson of Tillyorn, L.

Younger of Leckie, V.

5.44 pm

Amendments 84AGA to 84AGE not moved.

Amendment 84AH

Moved by Lord Clement-Jones

84AH: After Clause 69, insert the following new Clause—

“Greater protection for authors when assigning or licensing copyright

In paragraph 1(c) of Schedule 1 to the Unfair Contract Terms Act 1977 (scope of sections 2 to 4 and 7), omit “copyright”.”

Lord Clement-Jones: My Lords, there is currently in many cases an imbalance in economic power between the creator and those with whom they are dealing on copyright. I moved an amendment similar to this in Grand Committee, and at that time the Minister said that the Unfair Contract Terms Act is intended to regulate only business to consumer relations. Of course that is correct. The Minister has, however, agreed to see what can be done by way of review within the Department for Business, Innovation and Skills of this type of issue.

The amendment is designed to elicit from the Minister an assurance that this work will be undertaken. I have sent the Minister a paper suggesting how such a review might take place. It would be an independent review of copyright contracts for creators and would explore how copyright contracts could be made fairer to ensure that creators receive a fair share of the money that consumers pay for copyright content and that the purpose of copyright in stimulating and sustaining creativity is met.

The kinds of contracts that such a review might consider are those with publishers, broadcasters, record labels and film studios; creator’s contracts with, and mandates to, collecting societies; and contracts with internet platforms such as Flickr. Some possible solutions for the review to explore—I am not going to go through them all—might include whether the doctrine of undue influence that applies when a person in a

11 Mar 2013 : Column 54

dominant position uses that position to obtain an unfair advantage for himself or herself could be codified in statute law; or whether, for instance, a right to equitable remuneration for creators is a necessary underpinning to fair contracts for creators; and whether model licences and codes of conduct could extend the benefit of collective negotiations through professional bodies to a wider range of creators, particularly new entrants to the entertainment industries and consumers-turned-creators. I very much hope that the Minister can indicate how a review might take place and who would be responsible for it. I beg to move.

Baroness Buscombe: My Lords, I support this amendment, to which I have added my name. I support everything my noble friend Lord Clement-Jones has already said. This amendment would go some way to mitigate risks to the individual creators, without whom there is no creative economy. We have here more risks of unintended consequences of the government proposal for extended collective licensing. Already before the passage of the Bill, there is renewed pressure on individual creators to sign away to publishers all their rights, including rights to income from extended collective licensing. While creators are vulnerable to the take-it-or-leave-it approach in contracts offered by powerful organisations, the likelihood is that creators will thus be deprived of the compensation for the use intended by the drafters. I should add that we have had so much correspondence in this regard that we are looking to my noble friend the Minister for strong reassurance.

Lord Jenkin of Roding: My Lords, I support this amendment. As I understand it, there has been a presumption in some way that the Unfair Contract Terms Act applies only to dealings between business and the consumer. Of course, there are in the field of copyright—indeed, I suspect in many aspects of intellectual property—areas where there is a substantial imbalance between the negotiating power of the intellectual property owner and the prospective licensee.

I understand that the Department for Culture, Media and Sport has been impressed by this argument. I have been told that there are discussions currently going ahead with my noble friend’s department to see if there is some way in which this imbalance could perhaps be recognised in the law. It might well not be possible to do it in this Bill, and on that I wait to hear my noble friend’s argument. I would like to be assured that the discussions going on within government—I understand this may be between the two departments—will continue so that there can be a proper examination of whether this extension can be made in some way. There is no doubt about it; someone has to deal with what at the moment looks, to many of the people in the creative industries, like a very unfair balance. It is part of the duty of government to see that that is put right. I hope my noble friend will be able to give us that assurance.

The Earl of Erroll: My Lords, we need to move somewhere in this direction, so I support this amendment. The unfairness of copyright law recently came home to me. Someone wanted to publish a book involving some of my ancestors, and asked whether they could

11 Mar 2013 : Column 55

use some material that I had at home. I replied, “Certainly, I would be delighted”. Then they said, “We need a release document”. They put a contract in front of me that said that they would have total rights to this material throughout the universe, known and unknown, in media not yet developed, incorporated and not incorporated—this, that and the other. The only thing it did not include was parallel universes. The contract said that I would have to defend the copyright whenever and wherever required, at my cost. I was not receiving anything for this; I was simply trying to be kind and helpful to someone who was making a documentary. I asked someone legal about it who said, “Oh, they probably couldn’t enforce it because it’s an unfair contract”, but apparently it is not because unfair contracts do not apply to copyright. I therefore asked whether other people had signed this, and was told, “Oh yes, they’ve signed them. Don’t worry, I’m sure nothing will happen”.

It is madness for people to sign these things. Something will come home to roost. You have only to look at the chancel repair bills that some people receive as a result of things signed long ago, which come home to roost generations later. This copyright thing would, if I had signed it, presumably have burnt my heirs and successors as well for the period of that copyright. This is potentially quite serious—something that people are ignoring. They think that it will go away and that it does not matter because it is so over the top. I struck through all the relevant clauses in the contract and said, “Right, you can have whatever rights you want to it, but you defend it and look after it”. I never heard any more and they never used the material, which is sad.

This is all part of the previous discussion on orphan works and extended collective licensing. So much is locked up that could help the future, help current understanding of the past and help to disseminate things, yet the big rights holders are so bullying in holding on to this material that they are preventing its dissemination. We have to open up and start being more reasonable, particularly in the digital age. On this amendment, therefore, I definitely support the noble Lord, Lord Clement-Jones.

Viscount Younger of Leckie: My Lords, I start by answering a question that my noble friend Lord Clement-Jones raised at the beginning. Well, it was more of a point, really. He said that he had sent a paper to me on how the issue of unfair contracts could be addressed. I confirm at the beginning that I have received this paper and that we will consider his suggestions very carefully. It is a little early to talk about this as a formal review, but I reassure him that we will certainly discuss this and take it forward.

However, I thank my noble friends for this amendment. I understand that individual creators can be at a disadvantage when negotiating contracts with intermediaries and large organisations. However, I believe that amending the Unfair Contract Terms Act in this way, as intended by this amendment, would not address these concerns. My noble friend Lord Clement-Jones is aware that we have had discussions on this outside the Chamber. This is because the provisions of this part of the Act are limited in scope. Section 3

11 Mar 2013 : Column 56

applies only where one of the parties is a consumer, or is on the other party’s non-negotiated standard terms of business. However, we should also consider the overarching point. Successive Governments have maintained the principle that businesses should be able to contract freely with each other, and that the Government should not unduly fetter or circumscribe this freedom.

My noble friends have raised valid concerns about individual creators. Although I do not consider that the Bill needs amendment in this respect, I would be happy to meet creators to explore these issues further. I hope that in the light of what I have said, my noble friends will not press their amendments.

The Earl of Erroll: Will the Minister clarify something? It sounded as though this amendment would cover the situation in which I found myself. If a creator is a sole trader, will he be covered as a business to consumer rather than business to business? Would that help?

Viscount Younger of Leckie: The noble Earl raises an interesting point. This is very much a technical issue. As noble Lords will be able to imagine, a number of lawyers were involved before I was able to stand at the Dispatch Box today. On that point, I ask the noble Earl to allow me to get back to him with a specific reply.

Lord Clement-Jones: My Lords, I thank the Minister for that reply. I also thank the noble Earl, Lord Erroll, for his comments. He rarely supports one of my amendments, and I have learnt more about his ancestors today than on many previous occasions, so I thank him for his support.

The issue is not whether or not to amend this particular Act. As the Minister says, the Unfair Contract Terms Act does not apply to copyright or business-to-business transactions. Therefore, the essence of this is that, where many of these small creators are small businesses, we need to find a mechanism that will create a more level playing field with some of the larger contractors with whom they want to do business, and to find some way in which those transactions can be reviewed in the way that I suggested.

The Minister did not go quite as far as I would have liked and commit to a review. I think he said that he would meet to discuss how a review might take place. I will take that for what it is. I very much hope that I will be able to persuade the Minister, especially with the paper I sent him, which I confess was drawn up by the Creators’ Rights Alliance, which represents smaller creators and feels very strongly about these issues. I am sure that its members will be only too delighted also to meet the Minister. In the mean time, I beg leave to withdraw the amendment.

Amendment 84AH withdrawn.

Amendment 84AHA

Moved by Lord Clement-Jones

84AHA: After Clause 69, insert the following new Clause—

“Diligent search

(1) The Copyright, Designs and Patents Act 1988 is amended as follows.

11 Mar 2013 : Column 57

(2) In section 97(2)(a), after “infringement” insert “, in particular whether in respect of any work or group of works the defendant has carried out a diligent search in accordance with the requirements of inserted section 116A.”

(3) In section 191J(2)(a), after “infringement” insert “, in particular whether in respect of any work or group of works the defendant has carried out a diligent search in accordance with the requirements of paragraph 1A of Schedule 2A.”

Lord Clement-Jones: My Lords, I am afraid that this House will get rather tired of my voice over the next few minutes. I beg to move Amendment 84AHA. This amendment seeks to clarify the matters to be taken into account by a court in exercising its discretion to award additional damages in certain cases of copyright infringement. The power to award such damages for copyright infringement is contained in Section 97 of the Copyright, Designs and Patents Act 1988, and Section 191J covers infringement of performers’ rights. As the provisions are identical in form, I will speak only to copyright infringement.

Additional damages are a form of damages that are intended to have a punitive or deterrent effect on the infringer, and are awarded in exceptional cases, in addition to the compensatory damages based on a reasonable royalty that are the usual remedy for copyright infringement. They are often referred to as “flagrancy damages”. Some kinds of copyright infringement are carried out with such flagrant disregard for the rights of the copyright owner that it is appropriate to have a sanction available to the civil courts that both contains an element of punishment of the infringer and which, more importantly, acts as a deterrent to others who might consider doing something similar. The sanction is not often used, but has been applied, for example, where the defendant has already been found to have infringed and then repeats the infringement.

This amendment will bring the provision up to date to reflect the changes being made by this Bill in relation to orphan works. Your Lordships will recollect that it is proposed that before any work can be declared an orphan it must be subject to a diligent search for its owner. There is considerable disquiet in some parts of the creative community about how conscientious all those who wish to use orphan works will be in carrying out such a search. Of course, we expect that in due course there will be some detail, which the Minister has described in detail, of the requirements set out in the relevant regulations. They will be designed to minimise the possibility that people will take inappropriate advantage of this provision.

None the less, given the enormous potential commercial benefits, it is entirely likely that some organisations will seek to test how little they have to do by way of diligent search. In particular, one of the concerns raised with me is that a potential user may argue that, as they have carried out a search in relation to one item in a group of works, they should be permitted to assume that the result will be the same for the others, and that they are relieved of the need to carry out separate searches. We debated this only a few groups ago.

The protection that this affords to people is that before their work can be declared an orphan and used without their authorisation, there must be a diligent search. This simple amendment deals with the temptation

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to use the orphan works provisions in a manner that is clearly not intended by the Bill. It spells out that failure to carry out a diligent search will be one of the considerations that the court takes into account when deciding whether or not to award additional damages. It will not be definitive of the question, just one factor to be taken into account.

This would send a clear message that the new freedoms provided by these provisions are not to be abused, especially not at the expense of creative individuals who do not have the resources of large corporations standing behind them to enforce their rights. This is an important aspect and one that is entirely consistent with the policy direction behind these measures. I beg to move.

6 pm

Viscount Younger of Leckie: My Lords, Amendment 84AHA returns to the subject of diligent search, something that was discussed in one of the earlier groupings. I understand and sympathise with the intention behind this amendment. However, the Government are not convinced that a failure to obtain an orphan works licence legally should be treated as an aggravating factor over and above any other form of copyright infringement. There are already provisions in the 1998 Act for special damages, but the general principle of law at issue is that civil redress is about compensation rather than punishment. The Government feel that the courts should be in the best place to determine damages in the light of the circumstances of each case. I hope that in this light my noble friend will not press his amendment.

Lord Clement-Jones: My Lords, I thank the Minister for that. I will need to consider some of the points that he has made. I am not sure whether I agree that it should be a matter of pure compensation and not damages, but I am sure that his words will be worth looking over again in the light of day. In the meantime, I beg leave to withdraw the amendment.

Amendment 84AHA withdrawn.

Amendment 84AHAZA

Moved by Lord Clement-Jones

84AHAZA: After Clause 69, Insert the following new Clause—

“Right of identification

(1) The Copyright, Designs and Patents Act 1988 (the “1988 Act”) is amended as follows.

(2) For section 78 (requirement that right be asserted) substitute—

“78 Moral rights

(1) The rights conferred by this Chapter (moral rights) are—

(a) exercisable without formality in unpublished works,

(b) exercisable without formality in works made available to the public after this section comes into force.

(2) There shall be no cause of action for omission of attribution in re-publication of a work that was legitimately made available before the commencement of this section, unless the rights conferred by this Chapter were asserted at the time.”

(3) For section 205D (requirement that right be asserted by performers) substitute—

“205D Moral rights

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(1) The rights conferred by this Chapter (moral rights) are—

(a) exercisable without formality in unpublished works,

(b) exercisable without formality in works made available to the public after this section comes into force.

(2) There shall be no cause of action for omission of attribution in re-publication of a work that was legitimately made available before the commencement of this section, unless the rights conferred by this Chapter were asserted at the time.””

Lord Clement-Jones: My Lords, I beg to move Amendment 84AHAZA. The labelling of the amendments gets more and more complicated as time goes on.

The requirement that the moral right be asserted is widely agreed not to be a particularly useful concept. Discovering whether a right has been asserted is in many cases, for practical purposes, impossible. It was noticeable that the Minister confirmed in our previous discussion of orphan works that it would not be necessary in certain circumstances that a right be asserted. In the case of a photograph, for example, it may be necessary to refer to the invoice for payment for the licence for first publication. A consultation held following the debate on the Digital Economy Act could find no reason to retain the requirement to assert the right of identification, and I am aware of no body that is strongly attached to retaining this requirement.

I believe that the Intellectual Property Office has indicated that it is proposed that a right shall be treated as being asserted, and this was confirmed today, in respect of orphan works in the regulations proposed under Clause 69. This amendment therefore makes an important amendment to the Copyright Act and makes the situation uniform. All authors and performers having the right to be identified is an essential precondition for measures to permit licensing of orphan works and to help to prevent the creation of new orphans. More will be required to strengthen this right and to protect the metadata that contains the identification of authors and performers, but this is an important start. It would remove a serious barrier to the ordinary citizen having a right to be identified in the first place, since they are very unlikely to be aware of the requirement to assert. I beg to move.

Lord Jenkin of Roding: My Lords, I very much support this. I believe that it is a very worthwhile amendment. I cannot understand why somebody who is claiming the right to be the copyright owner of an orphan work should have to assert his right from the beginning. He will not know about this, as it is a requirement that will be hidden in the legislation. I cannot for the life of me understand why he has to do this in advance, as it were. It is an unnecessary restriction and requirement to be placed on the shoulders of an individual, perhaps an artist, writer or musician, who says that they are the author and owner of an intellectual property, only to be told that they have not asserted their right from the beginning. I do not believe that that is right.

I hope that my noble friend will look on this amendment sympathetically and, even if he cannot accept the words, undertake to have a good look at the issue and perhaps meet some of the people concerned, with a view to having something put into the Bill at

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Third Reading. I think that my noble friend Lord Clement-Jones has made a very sound point in moving this amendment.

Viscount Younger of Leckie: My Lords, the noble Lord’s proposed amendment would make automatic the right to be identified as the author of a work. Currently Section 78 of the Copyright, Designs and Patents Act 1988 provides that moral rights, including the right to be identified or attributed, must be asserted to take effect. The Government appreciate that there is a legitimate debate around the issue of moral rights, particularly the right to attribution. Some stakeholders would like to see the moral rights of creators strengthened further. The Government acknowledge that there are creators who would like to see the right of attribution become automatic and some who would also like it to be unwaivable. We are also aware, however, that other creators take the view that moral rights, such as the right of attribution, can have an economic value. These creators argue that they should be free to decide whether to exploit that value.

As can be seen, this is a complex area on which creators hold strong and often differing views. The economic question of the cost of using works is an important one. Changing the law on moral rights would affect many groups in different ways. It is not an insignificant question and would require a full consultation. I hope that these words help to answer some of the questions raised by my noble friend Lord Jenkin and that, in the light of what I have just said, my noble friend Lord Clement-Jones feels able to withdraw his amendment.

Lord Clement-Jones: My Lords, I thank the Minister for that response, and I thank the noble Lord, Lord Jenkin, for his very valuable support. I appreciate the Minister saying that there is a legitimate debate. There are, of course, a number of aspects of moral rights that are debatable, not only the automatic right stated in this amendment but also the issue of waiver, the question of the economic value of moral rights and so on. This amendment was a way of putting a marker down that this is an area that is somewhat archaic. If we are going to move on, especially when the new exceptions come into play, we must look at further aspects of reform of copyright law, such as the way in which contracts are made with creators, aspects of moral rights and metadata. This is an area that the IPO could very usefully focus on and, in the next round of legislation, look and see whether we can get rid of something that I believe is now not required and is rather out of date and unnecessary. In the mean time, however, I beg leave to withdraw the amendment.

Amendment 84AHAZA withdrawn.

Clause 71 : Members' approval of directors' remuneration policy

Amendment 84AHAZB

Moved by Lord Mitchell

84AHAZB: Clause 71, Page 67, line 9, at end insert “for the purpose of providing for inter alia, in the case of quoted companies, the policy’s approval by means of an annual resolution under section 439A”

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Lord Mitchell: My Lords, in moving Amendment 84AHAZB, I will also speak to Amendment 84AHBA, which is consequential. These would give shareholders an annual binding vote on executive remuneration.

Last year, my noble and very dear friend Lord Gavron tabled a Private Member’s Bill on the subject of executive pay. Sadly, he cannot be with us today. In the next few days, he is due to have a very serious operation. I know that I speak for the whole House when I wish him a very safe and speedy recovery. It was the noble Lord who first stimulated my interest on this issue when he asked me to support his Bill. Of course, I was pleased to do so. Since then, I now find myself on the Front Bench and fortuitously in a position to lead the opposition position on this issue. It must also be said that the noble Lord, Lord Gavron, is also a generous supporter of the High Pay Centre, which has conducted a great deal of important research on this subject. Based on discussions that the noble Lord had with the noble Lord, Lord Marland, and others, he felt that the Government had taken his points on board and in consequence he withdrew the Bill. To their credit, the Government have indeed incorporated some of the points made in the Gavron Bill, but I believe that this Bill can still be improved on. That is what we are seeking to do.

At the heart of the matter lies the empowerment of shareholders. Just in case noble Lords question my position in speaking on this subject, I add a little personal background. From 1972 to 2006, I set up numerous businesses. Some were very successful, some were total disasters. I will make no further reference to the Soho restaurant that vanished without trace. I lost a packet and there were several others like that. On the other hand, I have had my notable successes. I have been in the IT services business most of my adult life. I created three businesses from scratch, built each of them over 10 or more years and then sold them. Each company became a market leader and two of them were international operators. Not surprisingly, I dwell upon my successes these days although it must be said that the failures made me a better man. I learnt one golden rule: stick to what you know.

I am a senior entrepreneur in tooth and claw. I know that success is wonderful and failure is painful. I understand the rules of the game. I have made this personal statement to put it all in context because the series of amendments I have tabled, and which we are about to discuss, centre around the rights and powers of the shareholder, with whom I have a strong personal sympathy. The shareholders are the owners. If the company does well, their share price goes up. If it fails, they can lose the lot. Executives can move on; shareholders are left with a loss. The board of directors is accountable to the shareholders and the management reports to the board of directors.

In many small private companies, the management, the board and the shareholders are often one and the same, but in quoted companies this is seldom the case. That is one of the reasons why these amendments refer solely to quoted companies. There are, of course, other stakeholders in all companies, first and foremost, the employees, but also the customers, the suppliers and the community where the company is located. They are important but just for now we are concentrating

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on the shareholders and their rights to know and to control. When we address executive pay, we are saying that this subject is so important that the shareholders of a publicly listed company should not only be consulted but should also vote on the policy and the actuality of the pay packages that senior executives are to receive.

Much today is said about the shareholder spring—the hope that shareholders will assert themselves more and, of course, we agreed wholeheartedly with this. If we look around the world, shareholders are flexing their muscles in all sorts of ways. In the United States, the Dodd-Frank enactment of 2010 has significantly tightened shareholder scrutiny on executive compensation. This is referred to as “say on pay”. In the EU a couple of weeks ago, strong recommendations were announced with respect to bankers’ pay and bonuses. It will not have escaped noble Lords that just over a week ago, the Swiss, of all people, held a referendum on curtailing bankers’ bonuses. The proposal received 67% support among Swiss voters; 1.6 million of them turned out to vote; and all 26 cantons approved it. Were we to have such a referendum here, one wonders what the result would be, although we can get some idea by looking at the attitudes of the British public. Only 7% of those polled say that they think that the CEO of a large company should receive compensation of more than £1 million and only 1% think that they should be paid more than £4 million a year. Is that any wonder when profits for failure feature so heavily in the news? For example, last week, HSBC announced that 204 of its global staff were to receive £1 million in bonuses and compensation—this in a year that has seen the bank fined £1.2 billion for laundering Mexican drug money. RBS has made it clear that a £5.2 billion loss was no barrier to paying out more than £600 million in bonuses.

6.15 pm

Before going any further, I want to scotch one of the more pervasive arguments against taking firm action, which is that in a global market any such moves will lead to CEOs leaving for countries which do not have to show any restraint—the so-called “pay ‘em or lose ‘em” line. There is no evidence to show that this is true; indeed, there are contrary data. Of the Fortune 500 companies, only four have CEOs who were recruited while being CEOs in another country. That is 0.8%. The number of CEOs who were poached from their roles as CEOs at other companies moves up to 6.5%. Therefore, it is disingenuous to suggest that any restraint leads to an exodus for the facts are obvious: no matter how superb a CEO may be, taking him or her from one company and plonking them down in another is not always a successful ploy. Furthermore, this blackmail scenario of, “Either you give me a whacking increase or else I am off to another company” or, in this case, another country, is often a bluff that deserves to be called. My advice to anyone who is faced with this gun to their head is to show the person the door. This applies just as much to bankers as it does to non-banking companies, as illustrated by the annual saga of Sir Martin Sorrell’s salary, which has come to light this weekend.

Shareholder power is increasingly becoming a hot political issue. We agree with this week’s edition of the

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Economist

, the leading article of which is headed, “Power to the Owners”. Some people resent encroaching shareholder power, but we welcome it. When the good folks in Switzerland seek to ensure that executive pay is subject to shareholder approval, we can only applaud. In the United States, shareholders in successful companies such as Disney and Apple are becoming very assertive. In days gone by, the only shareholder activism was the occasional nutter or the predatory raider, but, most of all, the Wall Street walk pervaded: that is, if you do not like the management, you can sell your shares. However, I think the times are a-changing. The mood is also changing here. Our laws need to keep pace with the change and that is what we are seeking to do.

As I said in my opening remarks, the Government have taken on board some of the recommendations made in the Private Member’s Bill of the noble Lord, Lord Gavron. The Government propose in Clause 71, headed, “Members’ approval of directors’ remuneration policy” that a resolution on this issue should be moved at an accounts or other general meeting no later than every three financial years. Something is better than nothing but we believe that this requirement would be much more powerful if it were an annual requirement, as proposed in Amendments 84AHAZB and 84AHBA. This is crucial. It means that executive pay is not an issue that is engaged with occasionally but is forced on at every AGM, in much the same way as approval of the accounts or the selection of the company’s auditors—it is that important. The triennial approach for which the Government have opted seems too casual for this critical shareholder approval. When most newspapers carried the news that Swiss shareholders were to receive a vote on pay, they did not say how often that would occur because it was obvious. Like so many company accounting requirements, it will be annual.

I quoted the FT editorial on the matter in Grand Committee, but will do so again because I think that it neatly summarises the key point. It said of directors that annual binding votes,

“would at least put them firmly on the spot. Mr Cable’s triennial polls, however well-meaning and thoughtful, may not”.

The annual vote was what the Government consulted on and gave the appearance that they would opt for. We believe that it is the better option when it comes to holding boards to account. This should not, however, be equated with a policy of short-termism in British companies. It is our belief that companies should plan over the long-term basis. The Cox review commissioned by the Labour Party reported last week and included some admirable recommendations about how companies can ensure that the pay of their directors reflects the long-term aspirations of the company. One is that a third of executive remuneration could be paid in the form of shares held back over five years. The Government believe that having a triennial vote on pay will encourage long-term thinking, and this is an important goal. However, reviewing a policy annually is not the same as making short-term plans. A successful company will produce a plan that stretches many years into the future, but shareholders should have the right to challenge, enquire and ultimately hold them to account at every annual general meeting. That is exactly what an annual binding vote would allow them to do.

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There appears to have been some element of confusion from Ministers about why the vote is not to be annual after they consulted on it. At Second Reading, the noble Lord, Lord Marland, said that he imagined that there would be enormous shareholder pressure on companies that continue their policies unchanged, whereas in Committee, the Minister suggested that investors were in favour of the triennial vote, saying that the Government had considered that carefully, and that investors and companies had welcomed the option of a three-year policy.

The Government have chosen to retain the annual advisory—as oppose to the binding—vote, but if shareholders choose to reject a company’s pay policy at this advisory vote, I understand that they will not get the chance to have a binding vote until the following year. Having an annual binding vote would be simpler, clearer and would ensure that boards remain conscious of the need for realism on their pay.

Now we come to the special resolution. Amendments 84AHAB, 84AHBB and 84AHCA would require a special resolution, rather than an ordinary one, to be passed by shareholders in order to approve a change to executive pay; in effect, 75% of the shareholders voting. This amendment has been tabled as, under the rules being proposed, it would still be possible for companies to ignore significant minorities of shareholders against their remuneration package. We want to strengthen shareholder power. In Committee the Minister said that the Government were looking to the Finance Reporting Council—the relevant regulatory body—to follow through with a commitment made to look at whether or not a company should have a duty to formally respond should such a significant minority of shareholders vote against pay. However, I am given to understand that it is unlikely to look at the matter this year. We can, therefore, be fairly certain that no action will be taken on this in the near future, despite the other moves, both within this legislation and elsewhere in Europe, to look at the relationship between companies and their shareholders when it comes to pay.

This is an important matter, which I would like to address today. Company shareholders are a more disparate group than they were in the past. The Kay review pointed out that the effect of increases in the number of UK shareholders that live in other countries is to make it harder for them to organise and collaborate to ensure that they get the outcome that they want. The percentage of shares in UK-listed companies which were held outside of the UK in 1981 was 3.6%; by 2008, that figure had risen to 41.5%.

Another issue, on which both the Kay review and the Cox review have made important comments, is on the nature of shareholding today. In 2011, Mr Andrew Haldane from the Bank of England noted:

“there is evidence of the balance of shareholding having become increasingly short-term over recent years…Average holding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008”.

Furthermore, he said of the banking sector:

“Banking became, quite literally, quarterly capitalism. Today, the average bank is owned by an investor with a time-horizon considerably less than a year”.

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These factors were among those that have made it increasingly difficult for long-term shareholders in a company to hold its board to account. Again, the Government recognised this problem in their consultation. They said:

“Although shareholder activism on pay appears to be strong amongst institutional investors, the increasingly diverse and fragmented nature of shareholders in the UK means that the likelihood of seeing 50% or more votes cast against any resolution can be reasonably expected to remain extremely low”.

In his speech last January, trailing these remuneration reforms, Secretary of State Vince Cable said:

“For example, the future pay policy might require approval by 75% of the votes cast”.

In 2012, during what has become known as the shareholder spring, there were undoubtedly some significant votes against pay packages—again, I refer to Sir Martin Sorrell and his 30% increase. Here we are in 2013 and the very same issue is back on the agenda. However, there was still an overall increase of 12% in executive pay from 2011 to 2012—a year when increase for everyone else averaged out at 2.8%. A mere 12% of the population received a pay rise of more than 4%. Widespread discontent can be covered up under the current rules; companies do not even have to respond. In 2009, for example, one in five FTSE 100 companies had more than 20% of their shareholders withhold support for their remuneration reports in an advisory vote.

It is harder than it was in the past for shareholders to organise effectively, but when a significant minority of them do, it is still possible for a company to ignore them. This amendment would remedy that, and I hope that the Government will consider it carefully. I beg to move.

Lord Wills: I am very grateful for that, but I just hoped that before my noble friend sat down he could address one particular issue that is of concern to me. He has put forward a compelling case for these amendments, and I hope that the Government will consider them extremely carefully. In his closing remarks he put his finger on one of the main problems with this whole area; it is not just that shareholders find it difficult to hold companies to account for their remuneration policies but that those shareholders are for the most part, as he has identified, large financial institutions. They are not as accountable as they perhaps should be to those whose savings they manage. Has my noble friend given any thought to making those institutions give an account of their policies on remuneration to those whose savings they manage, and why they have taken a particular stance on a company’s remuneration policy—to making those institutions more accountable—which might make them even more activist than they already are?

Lord Mitchell: I thank my noble friend for that comment. I think it is a really good idea. They should be accountable. They manage so much money, and I think it is a very important factor.

Lord Blackwell: My Lords, I am sure that all of us who are directors of public companies agree with the spirit of the Bill: that directors have an obligation to carry shareholders with them and to win their support

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for policies on remuneration as on other matters. However, the noble Lord’s particular point about having a special resolution to approve remuneration policy I found very difficult to follow. I am not sure that that argument was well made.

The special resolution requiring a 75% vote to approve a remuneration policy in effect biases any vote of shareholders against approving the director’s recommendations. I do not quite follow why, if 51% of voter shareholders believe that the remuneration policy is to the advantage of shareholders and 49 % believe it is against, the 49% should hold sway over the 51% who agree with directors. I could argue that there might be a case for biasing the vote the other way: that there ought to be presumption that the director is acting in the interest of shareholders and not necessarily that the majority voted the other way. However, I am perfectly happy to go along with a majority vote one way or the other. I just do not think that the noble Lord made any case for requiring a special resolution.

Lord Tugendhat: My Lords, I would like to address the noble Lord’s point about annual approval. I spoke in favour of annual approval on Second Reading, and I am a little surprised to be speaking on it again on Report. I gained the very clear impression from the wind-up speech of the then Minister the noble Lord, Lord Marland, that there would be annual approval. In referring to the noble Lord, Lord Gavron, Lord Marland said:

“He also asked me the frequency of the new binding vote on remuneration policy. The binding vote on future pay policy will happen annually, unless companies choose to leave their pay policy totally unchanged. I think there will enormous shareholder pressure on companies that continue to leave their policy unchanged”.—[Official Report, 14/11/12; col. 1608.]

I strongly agree with the noble Lord, Lord Mitchell, that this matter, like other important issues that come before the AGM, should be dealt with annually. Indeed, it would be eccentric to suggest that any other proposition be put forward. If the Minister really wants us to agree to triennial agreements, he will have to make a powerful case that has not yet been made in this Chamber.

It would be preferable if the Minister cast some light on how he interprets the undertaking of the noble Lord, Lord Marland. If the Minister is saying that any change whatever in executive remuneration is subject to a vote, we will, in practice, have annual votes because it is inconceivable that you would have a group of executive directors whose pay would remain completely unchanged for three years. Indeed, it is pretty unlikely that you would have a group of executive directors who themselves remained completely unchanged for three years. The overwhelming likelihood is that there would be changes in the pay packages and the composition of the executive group. If the Minister can assure me that any change whatever, either in an individual package or in incorporating the arrival of a new executive director, will mean that the matter has to come before an annual vote, I would be able to follow my noble friend. However, if he cannot do that and if he is saying that unlike the report and accounts and all kinds of other things, executive pay should be given special status and subjected only to triennial review, he is diminishing the value of the Bill.

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I said on Second Reading that I commend the Government for tackling this issue, and I hold to that position. It was not tackled under the previous Government and it is good that it should happen now. The Government have established the principle that the issue is a matter of public interest, but if that is the case, as is the case in other important areas such as the appointment of auditors and the annual report and accounts, why on earth should it not be dealt with on an annual basis? Or is the Minister going to suggest that the appointment of auditors should be made triennial, quinquennial or at some other interval? He must either try carefully to explain why he puts executive pay into a special category—not just tell us about investors saying something but actually make a reasoned case—or he must convince us that any change whatever will trigger an annual approval.

Viscount Younger of Leckie: My Lords, I wish first to follow on from the comments of the noble Lord, Lord Mitchell, concerning the noble Lord, Lord Gavron. I am sure that everyone on this side of the Chamber would agree that we wish him a speedy recovery. Secondly, I take this opportunity to acknowledge the considerable experience of the noble Lord, Lord Mitchell, in the management of companies and on the ups and downs of fortune. It was helpful to hear about his background.

6.30 pm

As noble Lords will know, the Government’s comprehensive reforms in this area address concerns that the link between directors’ pay and performance has grown weak. This is damaging for the long-term interests of business. It is right that the Government act to address this market failure by ensuring that shareholders have adequate information and power to hold companies to account. This contributes to the Government’s wider aim of establishing a corporate governance system that supports long-term sustainable growth.

I note the comments of the noble Lord, Lord Mitchell, concerning the Swiss pay reforms. It is interesting that the result in Switzerland shows that there is widespread global concern about the disconnect between top pay and company performance. Much of what is proposed is already a feature of the UK system or part of planned reforms such as annual votes on the re-election of directors and binding shareholder votes on executive pay. However, the Swiss Government now have the challenge of turning the result into law. We will be watching closely to see how this works out in practice.

Noble Lords have proposed amendments to both the frequency and the type of binding vote. Once again, I thank them for their input on this important issue. However, the Government continue to have reservations about the reforms that noble Lords propose. Amendments 84AHAB, 84AHBB and 84AHCA would require the vote on remuneration policy to be a special resolution that would require companies to secure the support of 75% of shareholders to pass. The Government have consulted stakeholders extensively on the level of support that should be required for remuneration resolutions. Investors agree that the vote on pay policy

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should remain an ordinary resolution. They have expressed concern that in cases where turnout is low, a special resolution would allow a small number of activist investors unfairly to overturn the views of a majority. There are cases that I can cite that fit into this category, such as ex-majority owners who remain owners but with a minority shareholding.

A special resolution could also cause significant disruption for companies where a single hostile investor holds a large block of shares. Special resolutions should be reserved for rare issues that have a major impact on shareholder rights or company value, such as recapitalisation or changing the articles of the company. The Government, however, agree that when a large minority of shareholders rejects a remuneration resolution, companies should have to respond. The Financial Reporting Council will look at whether such a requirement should be included in the corporate governance code.

The noble Lord, Lord Mitchell, asked when the Financial Reporting Council will consult on changes to the code. The council has said that it will consider potential changes to the code in the light of government reforms, including: first, how companies should formally respond when a significant minority of shareholders oppose a pay vote; secondly, the requirement that all companies adopt clawback mechanisms; and, thirdly, the extent to which the executive should serve on remuneration committees in other companies. The FRC will consult once the Government’s legislative reforms are finalised and we have seen how behaviour has evolved. However, having recently amended the code, the FRC does not anticipate making any further changes during 2013. I remind the House that the FRC is independent and it is right that it should decide on when it thinks is the right time to consider this matter.

Amendment 84AHBA would remove the requirement for companies to put their remuneration policy to a shareholder resolution at least every three years and instead require that this be done annually. I thank the noble Lord, Lord Mitchell, for the opportunity to explain further the Government’s position on this important matter. Shareholders are fully supportive of the fact that companies can put forward a three-year pay policy because this will promote a longer-term approach to pay. The option of a three-year pay policy is also welcomed by the many smaller quoted companies that offer less complex pay packages and that are confident that they could use their good relations with shareholders to agree a three-year policy. At the other end of the scale, some larger companies with more complex pay arrangements will be likely to want to amend their remuneration policy more frequently to ensure that targets and rewards remain challenging and aligned with company strategy—along the lines of the comments of the noble Lord, Lord Mitchell. In any case, we expect that where companies have a poor track record on pay, shareholders will choose to keep a tighter rein through an annual vote on the policy.

I should also remind noble Lords that shareholders have a wide range of other tools to hold companies to account on an annual basis. Opposing the annual implementation report will trigger a binding vote on the pay policy at the next AGM. Shareholders also have the existing right to force a resolution at an EGM

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and have annual votes on the re-election of directors. The Government remain convinced that giving companies the option of a three-year policy remains the best way forward.

I thank noble Lords for their contributions on these important issues and understand that their intention is to ensure that these reforms genuinely empower shareholders.

Lord Lea of Crondall: I am grateful to the noble Viscount for giving way. I would like to check that I have understood. He referred to the words “pay policy”, and an amendment is coming up shortly on the question of top to bottom ratios. If this is now an acceptable form of words, why do the Government not think there is now a need for a top to bottom pay policy, which we will come to in a minute?

Viscount Younger of Leckie: I will come to this in a minute. If the noble Lord will forgive me, I think it is best that we continue with this rather than move on to that particular subject. We can then focus on the noble Lord’s comment during the debate on the next amendment.

I should reiterate that throughout our consultation shareholders with considerable experience in investments research and analysis consistently expressed concerns about the downside effects of annual votes and special resolutions. This was acknowledged by my noble friend Lord Tugendhat. It is a fact, and it is the main point I want to make. Stakeholders have expressed their support for the Government’s proposals. For example, the Association of British Insurers stated that it is,

“pleased the Government has decided to proceed with this with a 50% voting threshold”.

The noble Lord, Lord Mitchell, raised some questions. First, he asked to which year a policy would relate if it were renewed annually. Well, he did not raise precisely this question, but it was alluded to. It is important to provide companies with the flexibility to decide themselves how the timing of the pay proposals will best work for them. Whether a pay policy relates to the current financial year or the following one is a decision for companies and shareholders to take together.

The noble Lord, Lord Mitchell, also raised the issue of the Cox review. I acknowledge this review, and the Government welcome its publication. The review raises some key issues about directors’ pay. I reassure the House that we will consider the recommendations made in the Cox review in the context of the Kay report. The Kay report provides a framework to restore relationships of trust and confidence, and to realign incentives throughout the investment chain. I remind noble Lords that the Government are fully committed to taking forward the recommendations made in Professor Kay’s review that investment in equity markets supports UK companies to deliver sustainable growth.

To conclude, my noble friend Lord Tugendhat raised the matter of annual votes, on which some fairly strong comments were made. I stress that in the end this is about giving companies and shareholders the flexibility to do what is best for them. However, the noble Lord is correct that a vote would be required in the event of any change in policy, so annual changes would lead to an annual vote.

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Lord Tugendhat: The noble Viscount used the words “any change in policy”. Am I right to understand him to mean that if there was a change in the remuneration of two or three directors, or even of just one director, during the course of 12 months, the total pay package would have to be put to the AGM that year and could not be held over for two or three years, or whatever was left? Would it have to be voted on immediately or at the next AGM?

Viscount Younger of Leckie: I can confirm that it would have to be voted on immediately, because the change had happened in that particular year, so there would be that trigger for year two, in effect. If I have failed to do so already, I ask the noble Lord to withdraw his amendment.

Lord Mitchell: I thank the Minister for his comments and all other noble Lords for their contributions. I will deal first with the 75% special resolution issue, which was raised by the noble Lord, Lord Blackwell. As my noble friend Lord Wills was saying, it is important for the shareholders to hold the executives’ feet to the fire in some respects. This is a crucial issue. I know there is a difference in this between the ordinary and the special resolution, but that was why we went for the 75%.

The main issue is the annual point. You only have to read any newspaper in this country, and indeed around the world, to see what a vexatious issue this is at the moment. The population is disturbed, and the financial press is disturbed. Not only the popular press but leading newspapers in this country and throughout the world bring up this issue of executive pay. It has got out of kilter. We are going for the annual situation rather than the triennial situation because it should be an automatic consequence and is just as important as the selection of auditors and the approval of the accounts. Three years just seems to us to be too long for such an important issue. I have listened to what the noble Lord has said, but I would like to test the opinion of the House.

6.46 pm

Division on Amendment 84AHAZB.

Contents 174; Not-Contents 221.

Amendment 84AHAZB disagreed.

Division No.  2

CONTENTS

Adams of Craigielea, B.

Ahmed, L.

Alton of Liverpool, L.

Anderson of Swansea, L.

Bach, L.

Bakewell, B.

Barnett, L.

Bassam of Brighton, L. [Teller]

Beecham, L.

Berkeley, L.

Bhatia, L.

Bichard, L.

Bilston, L.

Blackstone, B.

Blood, B.

Borrie, L.

Bradley, L.

Brooke of Alverthorpe, L.

Brookman, L.

Browne of Belmont, L.

Browne of Ladyton, L.

Campbell-Savours, L.

Carter of Coles, L.

Chandos, V.

Clancarty, E.

Clark of Windermere, L.

Clinton-Davis, L.

Collins of Highbury, L.

Corston, B.

Crawley, B.

Davies of Coity, L.

11 Mar 2013 : Column 71

Davies of Oldham, L.

Davies of Stamford, L.

Dean of Thornton-le-Fylde, B.

Dear, L.

Desai, L.

Donaghy, B.

Donoughue, L.

Drake, B.

Elder, L.

Elystan-Morgan, L.

Evans of Temple Guiting, L.

Falconer of Thoroton, L.

Falkland, V.

Farrington of Ribbleton, B.

Filkin, L.

Foulkes of Cumnock, L.

Gale, B.

Gibson of Market Rasen, B.

Giddens, L.

Glasman, L.

Golding, B.

Goldsmith, L.

Gordon of Strathblane, L.

Goudie, B.

Gould of Potternewton, B.

Grantchester, L.

Greengross, B.

Grenfell, L.

Griffiths of Burry Port, L.

Grocott, L.

Hanworth, V.

Harris of Haringey, L.

Harrison, L.

Hart of Chilton, L.

Haskel, L.

Haworth, L.

Hayman, B.

Hayter of Kentish Town, B.

Healy of Primrose Hill, B.

Hilton of Eggardon, B.

Hollis of Heigham, B.

Howarth of Breckland, B.

Howarth of Newport, L.

Howells of St Davids, B.

Howie of Troon, L.

Hoyle, L.

Hughes of Stretford, B.

Hughes of Woodside, L.

Hunt of Chesterton, L.

Hunt of Kings Heath, L.

Hylton, L.

Jay of Paddington, B.

Jones of Whitchurch, B.

Jones, L.

Judd, L.

Kennedy of Southwark, L.

Kestenbaum, L.

Kidron, B.

Kilclooney, L.

Kinnock of Holyhead, B.

Kirkhill, L.

Layard, L.

Lea of Crondall, L.

Leitch, L.

Levy, L.

Liddell of Coatdyke, B.

Liddle, L.

Lipsey, L.

Lister of Burtersett, B.

Low of Dalston, L.

Lytton, E.

McAvoy, L.

McDonagh, B.

McFall of Alcluith, L.

McIntosh of Hudnall, B.

Mackenzie of Framwellgate, L.

McKenzie of Luton, L.

Martin of Springburn, L.

Masham of Ilton, B.

Massey of Darwen, B.

Maxton, L.

Mitchell, L.

Monks, L.

Morgan of Drefelin, B.

Morgan of Ely, B.

Morgan of Huyton, B.

Morris of Handsworth, L.

Neuberger, B.

Nye, B.

O'Loan, B.

O'Neill of Clackmannan, L.

Patel of Bradford, L.

Pendry, L.

Plant of Highfield, L.

Ponsonby of Shulbrede, L.

Prescott, L.

Prosser, B.

Quin, B.

Radice, L.

Ramsay of Cartvale, B.

Rea, L.

Reid of Cardowan, L.

Richard, L.

Rogers of Riverside, L.

Rosser, L.

Rowe-Beddoe, L.

Rowlands, L.

Royall of Blaisdon, B.

Sawyer, L.

Sheldon, L.

Sherlock, B.

Simon, V.

Smith of Basildon, B.

Smith of Finsbury, L.

Smith of Leigh, L.

Snape, L.

Stevenson of Balmacara, L.

Stoddart of Swindon, L.

Stone of Blackheath, L.

Symons of Vernham Dean, B.

Taylor of Bolton, B.

Temple-Morris, L.

Thornton, B.

Tomlinson, L.

Touhig, L.

Triesman, L.

Tunnicliffe, L. [Teller]

Turnberg, L.

Turner of Camden, B.

Uddin, B.

Wall of New Barnet, B.

Warner, L.

Warnock, B.

Warwick of Undercliffe, B.

Watson of Invergowrie, L.

Wheeler, B.

Whitaker, B.

Wigley, L.

Wilkins, B.

Wills, L.

Wood of Anfield, L.

Worthington, B.

Young of Norwood Green, L.

NOT CONTENTS

Addington, L.

Ahmad of Wimbledon, L.

Alderdice, L.

Anelay of St Johns, B. [Teller]

11 Mar 2013 : Column 72

Ashcroft, L.

Ashton of Hyde, L.

Astor of Hever, L.

Attlee, E.

Avebury, L.

Baker of Dorking, L.

Barker, B.

Bates, L.

Benjamin, B.

Berridge, B.

Best, L.

Bew, L.

Bilimoria, L.

Black of Brentwood, L.

Blackwell, L.

Blencathra, L.

Bonham-Carter of Yarnbury, B.

Bottomley of Nettlestone, B.

Bowness, L.

Brabazon of Tara, L.

Brinton, B.

Brittan of Spennithorne, L.

Brooke of Sutton Mandeville, L.

Brookeborough, V.

Brougham and Vaux, L.

Browning, B.

Burnett, L.

Buscombe, B.

Byford, B.

Caithness, E.

Cathcart, E.

Cavendish of Furness, L.

Chalker of Wallasey, B.

Clement-Jones, L.

Colwyn, L.

Cope of Berkeley, L.

Cormack, L.

Courtown, E.

Craig of Radley, L.

Craigavon, V.

Crickhowell, L.

Crisp, L.

De Mauley, L.

Deighton, L.

Dholakia, L.

Dobbs, L.

Doocey, B.

Dykes, L.

Eaton, B.

Eccles of Moulton, B.

Eccles, V.

Edmiston, L.

Elton, L.

Emerton, B.

Empey, L.

Falkner of Margravine, B.

Faulks, L.

Feldman of Elstree, L.

Fellowes of West Stafford, L.

Fink, L.

Flight, L.

Fookes, B.

Forsyth of Drumlean, L.

Fowler, L.

Framlingham, L.

Freeman, L.

Freud, L.

Garden of Frognal, B.

Gardiner of Kimble, L.

Gardner of Parkes, B.

Garel-Jones, L.

Geddes, L.

German, L.

Glasgow, E.

Glenarthur, L.

Gold, L.

Goodlad, L.

Goschen, V.

Grade of Yarmouth, L.

Greenway, L.

Griffiths of Fforestfach, L.

Hamilton of Epsom, L.

Hamwee, B.

Hanham, B.

Henley, L.

Heyhoe Flint, B.

Hill of Oareford, L.

Hodgson of Astley Abbotts, L.

Home, E.

Hooper, B.

Howard of Lympne, L.

Howe of Aberavon, L.

Howe of Idlicote, B.

Howe, E.

Hunt of Wirral, L.

Hurd of Westwell, L.

Hussain, L.

Hussein-Ece, B.

Inglewood, L.

James of Blackheath, L.

Jenkin of Roding, L.

Jolly, B.

Jones of Cheltenham, L.

Jopling, L.

Kakkar, L.

Kerr of Kinlochard, L.

Kirkwood of Kirkhope, L.

Kramer, B.

Laird, L.

Laming, L.

Lamont of Lerwick, L.

Lang of Monkton, L.

Lee of Trafford, L.

Lester of Herne Hill, L.

Lexden, L.

Lindsay, E.

Linklater of Butterstone, B.

Listowel, E.

Liverpool, E.

Loomba, L.

Lucas, L.

Luke, L.

Lyell, L.

McColl of Dulwich, L.

MacGregor of Pulham Market, L.

MacLaurin of Knebworth, L.

Maclennan of Rogart, L.

McNally, L.

Maddock, B.

Maginnis of Drumglass, L.

Marks of Henley-on-Thames, L.

Marland, L.

Marlesford, L.

Mawhinney, L.

Mawson, L.

Mayhew of Twysden, L.

Miller of Chilthorne Domer, B.

Montrose, D.

Morris of Bolton, B.

Naseby, L.

Nash, L.

Neville-Jones, B.

Newby, L. [Teller]

Newlove, B.

Northover, B.

Norton of Louth, L.

O'Cathain, B.

Palmer of Childs Hill, L.

Pannick, L.

Patel, L.

11 Mar 2013 : Column 73

Patten, L.

Pearson of Rannoch, L.

Perry of Southwark, B.

Popat, L.

Randerson, B.

Rawlings, B.

Razzall, L.

Reay, L.

Redesdale, L.

Ribeiro, L.

Ridley, V.

Risby, L.

Roberts of Llandudno, L.

Rodgers of Quarry Bank, L.

Roper, L.

Saatchi, L.

St John of Bletso, L.

Scott of Needham Market, B.

Seccombe, B.

Selborne, E.

Selkirk of Douglas, L.

Selsdon, L.

Shackleton of Belgravia, B.

Sharkey, L.

Sharp of Guildford, B.

Sharples, B.

Shaw of Northstead, L.

Sheikh, L.

Shipley, L.

Shutt of Greetland, L.

Skelmersdale, L.

Smith of Clifton, L.

Spicer, L.

Stedman-Scott, B.

Stewartby, L.

Stoneham of Droxford, L.

Storey, L.

Stowell of Beeston, B.

Strasburger, L.

Strathclyde, L.

Taverne, L.

Taylor of Holbeach, L.

Teverson, L.

Thomas of Gresford, L.

Thomas of Winchester, B.

Tope, L.

Trefgarne, L.

Trimble, L.

True, L.

Tyler of Enfield, B.

Tyler, L.

Ullswater, V.

Verma, B.

Waddington, L.

Wakeham, L.

Wallace of Saltaire, L.

Walmsley, B.

Walpole, L.

Walton of Detchant, L.

Warsi, B.

Wasserman, L.

Wei, L.

Wheatcroft, B.

Wilcox, B.

Williams of Crosby, B.

Willis of Knaresborough, L.

Younger of Leckie, V.

6.57 pm

Amendment 84AHAA

Moved by Lord Mitchell

84AHAA: Clause 71, page 67, line 9, at end insert—

“(2B) The regulations must require the inclusion of information regarding the 10 highest paid and 10 lowest paid employees in the company outside of the board and executive committee.”

Lord Mitchell: My Lords, Amendment 84AHAA speeds right to the heart of the matter in hand. The disparity in pay between top and bottom earners has informed much of the public outrage about remuneration, and it no doubt lies behind the polling figures that I mentioned previously. Had the minimum wage kept track with executive pay since it was introduced, it would now be worth in the region of £19 per hour. Instead, we see a very pronounced wage discrepancy. It is felt particularly acutely here in London, where many FTSE 100 companies and our financial sector are based. In 2010, the top percentile here received 16.5% more than the bottom percentile. The ratio between top and bottom pay has gradually grown over the past 30 years to the point that in both the Lloyds Banking Group and Barclays top pay was 75 times that of the average employee in 2011. By way of comparison, in 1979 the difference was only 14.5 times.

Put simply, too many are being left behind. This is certainly not the one-nation economy that this country needs. Therefore, shareholders should have more power to hold to account the companies they invest in, as we argued with regard to the previous amendment. Greater transparency about levels of pay at the top and bottom of the company would give shareholders the tools they

11 Mar 2013 : Column 74

need to make informed decisions on how they vote. This amendment gives shareholders those tools by requiring companies to disclose the top and bottom 10 earners outside the boardroom.

There are corresponding moves to increase transparency on pay, so it is worth going over why we consider there to be a need for this amendment. Most of the moves to get companies to release more information on pay to their shareholders cover only banking. The Treasury’s current consultation proposal is that the top eight highest-paid earners beneath boardroom level in banks are to have their salaries disclosed. Although it is difficult to know the details at present, it appears as though the European capital requirements directive IV will opt for a different disclosure proposal, whereby the figures for those earning more than €1 million a year are to be collated and sent to the EBA, which will then produce the numbers in a common format. It is possible that in some institutions this could produce less information than the Treasury proposal.

Both these proposals from the Treasury and in the European capital requirements directive IV differ from ours in several important ways. First, they concern only the banking sector, but this issue is not limited to that industry. Let us consider the top pay at BP. In 2011, it was 63 times that of average employee pay, whereas in 1979 the difference was only 16.5 times. However, these proposals had nothing to say about the severe problem of low pay, which, as my noble friend Lady Turner of Camden pointed out in Grand Committee, produces many difficulties in our society. I think we could all agree that pay at the bottom of a company should be considered when pay at the top is set.

The initial Private Member’s Bill of my noble friend Lord Gavron contained a similar provision. Clause 2 said:

“A company’s annual report must prominently feature details of the remuneration ratio between the highest remunerated director or employee and the average remuneration of the lowest remunerated 10% of employees”.

This amendment is slightly different but would have the same effect, introducing a measure of transparency as to the ratio between the highest and lowest paid workers.

Yesterday, Secretary of State Vince Cable pledged to support a push for openness about what tax businesses pay in different countries. This amendment is a similar push for transparency. I hope that the Government will find that they are able to support it. I beg to move.

Lord Lea of Crondall: My Lords, I strongly back this amendment. I know that it is not for here and now with the present Government, but in two years’ time it will be very interesting to see how a Labour Government get the architecture together to relate the income distribution of the rest of the enterprise to the incomes at board level. That is what they have in the most successful European societies—I include Germany, Holland and Scandinavia, and I do not think that anyone would draw up a very different list. In answer to the notion that these economies are not competitive, their place in growing world market share is far superior to that of Europe generally and certainly to that of Britain.

11 Mar 2013 : Column 75

The point has just been made that the banking sector is a rather special sector. I can tell you one respect in which it is very special: people get paid enormously more at the top than in any other sector. That is what is special about it. It is not special in the sense that there has not been a huge growth in the disparities in all the rest of the sectors. Anybody close to industry will know that two things happen when pay at the top gets to 30, 40 or 50 times that at the bottom. The first is that there is a crossover effect in the rest of the sectors—in construction, mining or any other sector. Banking does not live in a world of its own, although in some respects, of course, it does. Some people say that the banking industry is Britain’s biggest industry. When we were young, to say that banking was Britain’s biggest industry would have been thought a rather risible thing to say. Yet that is infecting the rest of the economy. A lot of the best talent used to go into the Civil Service. Now, not as much of the best talent is going into the Civil Service. Not as much of the best talent is going to many of the sectors that had their share of the best available talent years ago.

While we are on the subject of top people and talent—and what you might call inherited wealth, which is part of this question—the fact is that we are failing to bring out the best of the talents and opportunities of everybody else in society. So when one talks about 1%, one immediately says, “What about the 99%?”. I think that for this Government to ally themselves ideologically with the interests of the 1% at the top is going to prove a fatal mistake.

The clock is ticking, and those of us who now believe what this side of the House believes, in the challenges that we will face in two years’ time there must be some connection between our policy of worker representation on boards and what is happening in the rest of the company. You do not need to be Einstein to figure out that if there is some new structure of boards, there has to be some substructure. You cannot have a superstructure without a substructure. Whether it is through information and consultation bodies or any other way, it will be a major challenge to get it right this time under the next Labour Government. It is rather academic from the point of view of Members opposite in the Conservative Party, but it is a very interesting pointer to the future that this is one of the elements in the architecture that will be built.

Lord Blackwell: My Lords, I have listened very carefully to the speeches of the noble Lords, Lord Mitchell and Lord Lea of Crondall. While they made some interesting points, I did not find that either of them had any compelling rationale for this particular amendment.

We have all agreed that the remuneration policy for those at the top of companies has to be transparent and has to be voted on and agreed by shareholders; that is only proper. As for the low-skilled workers on the minimum wage, that is a matter which is voted on by Parliament in setting the minimum wage. However, I am not sure that to juxtapose those two things in a company’s annual report provides any useful information. Let us consider company A, which, we hope, does a

11 Mar 2013 : Column 76

great job for the community in employing lots of people, including low-skilled workers, on relatively low wages. Offering them employment helps them to come off benefits and thus creates a great benefit to society. Company B, operating in the same sector, decides to ship all those jobs off to India. Which company would shareholders—or, indeed, society as a whole—think is doing a better job? I do not think that juxtaposing how many people a company successfully employs at the lower end of the skill level compared to the top end, and comparing that with other companies, gives any useful information about whether those at the top of the company are being rewarded appropriately.

Lord Lea of Crondall: The noble Lord asked a direct question about the connection, because of the minimum wage, between the bottom and the top. One phrase that gives a clue to the connection is, “We are all in it together”. Does that not give any sort of clue to the noble Lord?

Lord Blackwell: That is precisely my point. I would have thought that the company that successfully employs lots of people at all skill levels, including those on the minimum wage or at a low-skill level, is helping society and helping us all to prosper together.

Another example is a company in a consultancy that employs only PhDs. The ratio between the top and the bottom in that company may be relatively small. Is that a better company than one that employs lots of people on the minimum wage? I think that this information is almost entirely irrelevant to any judgment about whether the pay at the top of the company is appropriate. That is a relevant question, but this information is potentially misleading and potentially encourages those viewing the annual report to take a misguided view of the appropriateness of the pay policy within the company. I do not think a case is being made for it.

Lord Kerr of Kinlochard: My Lords, I understand the general points made the noble Lord, Lord Mitchell, and I have considerable sympathy for them. However, I do not understand their relevance to Clause 71, which is about remuneration reports. The problem with remuneration reports is that the degree of detail now required in them means that they have become rather long and complex. An additional requirement to include a comparison between payments made to two categories of staff, neither of which is within the scope of the remuneration report, would add further complexity without the justification of relevance. Remuneration reports are about the remuneration of directors and senior executives. The amendment calls for the inclusion of factual material on individuals who are neither directors nor senior executives.

Such complexities have costs. Take two plcs with 70 and 100,000 employees across the world in, say, 50 to 85 countries. I am thinking of two examples which I know well. Is it really necessary, for the purposes of the remuneration report, to require them to establish with each of their businesses in each country where they operate which are the lowest pay rates paid, presumably to the most junior, temporary staff of that

11 Mar 2013 : Column 77

country, then take appropriate exchange rates and try to work out the unluckiest 10 in any of their operations anywhere across the world? The remuneration report is about the directors and senior executives. The purpose of a remuneration report must surely be to explain to shareholders the company’s remuneration policy and the result that it has produced for the senior individuals that the report is required to cover, and to do so as simply and clearly as possible. Would this amendment assist that? I do not think so.

Viscount Younger of Leckie: Amendment 84AHAA seeks to require that companies report on high and low pay outside the board. Taking high pay first, the issue of high pay outside the boardroom is most relevant in the financial services industry, as was mentioned earlier, where poorly designed remuneration structures can incentivise excessive risk-taking. We remain committed to having the most transparent financial centre in the world and we have already taken significant steps forward. During ongoing negotiations with Europe over new regulations for the banking sector, we have argued strongly for further improvements to the disclosure of pay below board level. As a result, the current EU proposals would require banks to disclose the aggregate pay of senior managers and material risk-takers in bands, as well as further information about how much is paid in total in fixed and variable pay. We await the outcome of these discussions before deciding whether additional UK regulation is necessary.

The noble Lord, Lord Mitchell, raised the issue of disclosure of pay below board level in banks and asked why the UK does not regulate. We argue that it does not make sense to proceed with UK regulations until we know the precise details of the European rules. Once this is confirmed, we will decide whether we need to go further. It is not a major issue in other sectors. In our consultation on this, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden and so we will not pursue this. The noble Lord raised the issue of pay below board level in non-banking sectors, which we acknowledge is an issue. In the end, pay reports are produced for shareholders, so they should be designed to include information that they want. We should not clutter them with information that they do not find useful. Shareholders and the Government share the view, however, that high pay below board level is not a major issue in other sectors. In our consultation, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden, so we will not be pursuing it. That point was made eloquently by the noble Lord, Lord Kerr of Kinlochard.

One matter that shareholders are increasingly interested in is how board pay relates to that of the wider workforce. That is why companies will have to say more about how they have considered pay across the whole of the company workforce. They will also be required to publish the percentage increase in pay of the chief executive officer compared to that of the workforce. I can directly answer the question raised under the previous amendment by the noble Lord, Lord Lea of Crondall. It is something that investors are asking for and is comparable across companies, but we have no plans to mandate that companies

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adopt a standardised ratio for top to median pay because it is clear that this measure has limitations. It is difficult to compare between different companies and sectors. For example, an investment bank with many highly paid staff will have a much lower pay ratio than a supermarket.

New regulations will implement these proposals. Noble Lords will have the opportunity to debate these regulations later in the year. I conclude by making an overarching general point about trends in pay. It is pleasing to note, although I acknowledge that there is still much work to do, that in 2012 several firms, including Aviva, WPP, Centamin, Pendragon and Trinity Mirror failed to win majority backing for their pay reports, with several senior executives stepping down in the face of shareholder opposition. Voting results from AGMs in 2012 suggest that the average vote against the remuneration report was 8.9%, up from 6% in 2011. So, there is more work to be done but the trends are going in the right direction. I therefore ask the noble Lord to withdraw his amendment.

7.15 pm

Lord Mitchell: My Lords, I shall come first to the Minister’s final point. These are good pointers that he draws to our attention. Much of what we have been trying to do is to accelerate the process, and to encourage shareholders to become much more involved so that we get even further results on this.

My noble friend Lord Lea of Crondall made an eloquent speech about working people working for companies and the fact that it is useful to see these disparities in black and white. Indeed, it is usual for countries in the north of Europe to do it, and they seem to be doing very well in the world economy. The noble Lord, Lord Blackwell, again made a useful contribution. I am not sure that I agree with his position but it was useful and not dissimilar to that of the noble Lord, Lord Kerr of Kinlochard. Our position is that it is information that some investors would like to know about companies: what is the disparity in those companies? I say to the noble Lord, Lord Kerr, that I had not really thought about it, but it must refer only to the United Kingdom. It had not occurred to me that we could be looking at the pay that somebody in a call centre in India gets compared with the senior executive of, say, a bank in this country. I have listened closely to everything that has been said, and I beg leave to withdraw the amendment.

Amendment 84AHAA withdrawn.

Amendment 84AHAB not moved.

Amendment 84AHB

Moved by Viscount Younger of Leckie

84AHB: Clause 71, page 67, line 36, leave out from “which” to “, and” in line 38 and insert “the company becomes a quoted company”.

Viscount Younger of Leckie: My Lords, the majority of these amendments are minor and technical and designed to improve the clarity of the legislation.

11 Mar 2013 : Column 79

Amendment 84AHH is substantive and I shall make the case for it first. It amends new Section 226E of the Companies Act 2006, which would be inserted by Clause 72. New Section 226E imposes a potential liability on directors who authorise an unapproved remuneration or loss of office payment. This amendment will ensure that, as is consistent with other provisions in the Companies Act 2006, a director who acts honestly and reasonably may be relieved of this liability if a court, taking into account all the circumstances, decides that it is appropriate to do so.

Noble Lords will understand the need for there to be legal consequences in the event of a company making a payment to a director which has not been approved by shareholders. In the first instance, the company may seek to recover the unauthorised payment from the director who received it. However, if this is unsuccessful, the directors who authorised the payment can be held liable for any losses incurred as a result. The company or its shareholders may take action to recover these losses from them. These consequences will act as a deterrent to the minority of directors who might deliberately try to pay more than shareholders have approved. However, the Government recognise that directors may make honest and reasonable mistakes, either through misinformation or misinterpretation of the remuneration policy. This is recognised in other parts of the Companies Act, which deal with unauthorised payments and under which directors who act honestly, or take reasonable steps to ensure compliance, are not subject to liability.

Unless we make a similar provision with respect to remuneration payments the risk of liability could hang over remuneration committees and affect the pay-setting process. This risks making remuneration committees heavily dependent on lawyers and overly keen to agree broad, vague policies. More worryingly, there is a real risk that this could deter good people from taking up important and challenging roles on remuneration committees. Case law shows that the courts apply a rigorous test when assessing whether a director has acted honestly and reasonably, particularly when the director concerned is one of a large public company. As such, we are confident that this provision will ensure that those directors who should rightly be relieved may be, while ensuring that those who should be held liable, are not.

We have also proposed a handful of minor and technical amendments which will clarify the legal drafting of the Bill on three issues, which I will speak to in turn. Amendments 84AHB, 84AHC and 84AHK clarify how and when Clauses 71 to 74 affect companies that become quoted after these provisions come into force. Amendments 84AHE, 84AHF and 84AHK make clear the different procedures that should be followed in the event of unapproved payments in the form of shares, property and other undertakings of the company. Finally, Amendments 84AHD, 84AHJ, 84AHL, 84AHM and 84AHN tidy up the drafting by moving some of the provisions in Clause 74 into other clauses so that they may appear alongside the sections to which they apply. I hope that noble Lords will support this. I beg to move Amendment 84AHB.

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Lord Mitchell: My Lords, we are very supportive of this amendment. It is clearly needed. I have only one question about whether the words “reasonably” and “honestly” are strong enough. A lot of lawyers would have a field day with this. I just ask the Minister to go away and think about whether we can perhaps have something a little more assertive, which would leave less latitude for a lot of lawyers to make lots of fees.

Viscount Younger of Leckie: I thank the noble Lord, Lord Mitchell, for that, and also for his contribution on this important issue. The proposed amendment to Section 226E ensures that those who should be rightly relieved of liability can be, while those who should be held liable will be. To answer his question about how one can define or further improve on the definition of “reasonable”, the concept of reasonableness has been thoroughly tested by the courts, which are very rigorous in judging directors. A court might take into account what advice a director had sought, what conversations had taken place, and what records were kept. Of course, it remains up to the court to decide and it will vary in each case. The court will take into account, for example, the full context of the situation. Therefore, the expectations of a “reasonable” director of a FTSE100 company with a strong compliance function and ease of access to professional advisers will be much higher than those of a director of a smaller quoted company. I hope that that takes matters forward and helps answer the noble Lord’s question. I also thank noble Lords for their understanding of the need for various minor and technical amendments.

Amendment 84AHB agreed.

Amendments 84AHBA and 84AHBB not moved.

Amendment 84AHC

Moved by Viscount Younger of Leckie

84AHC: Clause 71, page 68, line 8, at end insert—

“( ) Subsection (2) does not apply in relation to a quoted company before the first meeting in relation to which it gives notice under subsection (1).”

Amendment 84AHC agreed.

Amendment 84AHCA not moved.

Amendment 84AHCB had been withdrawn from the Marshalled List.

Clause 72 : Restrictions on payments to directors

Amendments 84AHD to 84AHH

Moved by Viscount Younger of Leckie

84AHD: Clause 72, page 71, line 23, at end insert—

“(5A) Nothing in section 226B or 226C applies in relation to a remuneration payment or (as the case may be) a payment for loss of office made to a person who is, or is to be or has been, a director of a quoted company before the earlier of—

(a) the end of the first financial year of the company to begin on or after the day on which it becomes a quoted company, and

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(b) the date from which the company’s first directors’ remuneration policy to be approved under section 439A takes effect.”

84AHE: Clause 72, page 71, line 30, leave out “Subject to subsections (3) and (4),”

84AHF: Clause 72, page 71, line 41, leave out “it” and insert “—

(a) subsection (2) does not apply, and

(b) the payment”

84AHG: Clause 72, page 72, line 2, leave out from end of line to “is” in line 3 and insert—

“( ) subsection (2) does not apply, and

( ) the payment”

84AHH: Clause 72, page 72, line 7, at end insert—

“(5) If in proceedings against a director for the enforcement of a liability under subsection (2)(b)—

(a) the director shows that he or she has acted honestly and reasonably, and

(b) the court considers that, having regard to all the circumstances of the case, the director ought to be relieved of liability,

the court may relieve the director, either wholly or in part, from liability on such terms as the court thinks fit.”

Amendments 84AHD to 84AHH agreed.

Clause 73 : Payments to directors: minor and consequential amendments

Amendment 84AHJ

Moved by Viscount Younger of Leckie

84AHJ: Clause 73, page 72, line 31, after “company” insert “other than a payment to which section 226C does not apply by virtue of section 226D(5A)”

Amendment 84AHJ agreed.

Clause 74 : Payments to directors: supplemental

Amendments 84AHK to 84AHN

Moved by Viscount Younger of Leckie

84AHK: Clause 74, page 74, line 7, at end insert—

“( ) In relation to a company that is a quoted company immediately before the day on which section 71 of this Act comes into force, section 439A(1)(a) of the Companies Act 2006 (as inserted by section 71(4) of this Act) applies as if—

(a) the reference to the day on which the company becomes a quoted company were a reference to the day on which section 71 of this Act comes into force, and

(b) at the end of the paragraph (but before the “, and”) there were inserted “or at an earlier general meeting”.

( ) In relation to a company that is a quoted company immediately before the day on which section 71 of this Act comes into force, section 226D(5A)(a) of the Companies Act 2006 (as inserted by section 72 of this Act) applies as if the reference to the day on which the company becomes a quoted company were a reference to the day on which section 71 of this Act comes into force.”

84AHL: Clause 74, page 74, line 8, leave out subsection (1)

84AHM: Clause 74, page 74, line 12, leave out subsection (2)

84AHN: Clause 74, page 74, line 29, leave out “(2) or”

Amendments 84AHK to 84AHN agreed.

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Amendment 84AHNZA

Moved by Lord Mitchell

84AHNZA: After Clause 74, Insert the following new Clause—

“Pre-packs

(1) The Secretary of State shall commission an independent review into pre-pack administration.

(2) Such a review shall report on but not be limited to the following—

(a) the adequacy of existing requirements in relation to transparency of arrangements;

(b) compliance with existing requirements by pre-packs including Statements of Insolvency Practice;

(c) adequacy of existing enforcement mechanisms in relation to compliance;

(d) rules relating to the continuation of supply to businesses on insolvency.

(3) A review under this section shall report to the Secretary of State no later than 12 months following the day on which this section comes into force.

(4) A copy of the report under subsection (2) shall be laid before both Houses of Parliament.”

Lord Mitchell: My Lords, I speak to Amendment 84AHNZA, which calls for the Government to commission an independent review into pre-pack administrations. Noble Lords will see that this amendment represents the recommendations of the BIS Select Committee report to the Insolvency Service, released on 29 January this year.

It might be helpful if I attempt to define a pre-pack administration. I find many people do not know what it is, and I am not surprised. It is where the directors of a failing company seek to preserve its continuing existence after administration by lining up replacement owners and finance before the administration takes place—in effect, relaunching the company with many of its creditors and minority shareholders stripped out, while effectively continuing the existing business in another name. It gives the business a second chance, but often at the expense of these creditors and shareholders. My contention is that it is often unprincipled and unfair. Usually, there is no creditors meeting and no consultation with the court before this takes place. The sale may be to individuals who were directors of the firm before the pre-pack administration, and the new firm may have a similar name. As I say, the only difference is that the new company is shorn of its debt and maybe its smaller shareholders. Effectively, it is cooking the books. Such firms have sometimes been known as phoenix companies, having risen from the ashes of the old insolvent company.

My interest in pre-packs arose when a company in which I had a minority shareholding interest wanted to restructure its financing to my detriment. To do this, it needed me to sign off on a revised deal. I refused. It threatened me with a pre-pack, a term that I had not heard of before, but about which I learned pretty quickly. I still refused and, fortunately, it backed down. However, I saw how that could be used as a negotiating tactic. More to the point, I saw how the small people can get hurt. Despite that, I am prepared to concede that pre-packs can have a very important function. They can allow a company to continue and

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the administrator to move quickly to preserve the business and, most importantly, jobs. That is what all of us want.

7.30 pm

A few weeks ago, I went to see the BIS Minister responsible for this issue, Jo Swinson MP. I cannot say that it was a particularly helpful meeting. Her approach was that pre-packs are good because they preserve jobs and the company. My view is that they can be bad when creditors such as SMEs are cast adrift and where employees are similarly left in the lurch in a very much weaker position. We beg to differ.

I believe that the time has come to have a comprehensive and independent review into that practice to see where improvements can be made and safeguards can be added. My purpose in introducing the amendment is to oblige the Secretary of State to look seriously at how those abuses can be addressed. They tell me that this is a hugely complex area and that it will be hard to draw up appropriate legislation. Indeed, the Government have tried and failed in this Parliament. My response is, “Since when did we turn our backs on something just because it is too hard?”. That should make us more determined.

I recognise the complexities, and I do not introduce the amendment today claiming to know all the answers. Let me outline some of the areas that need to be addressed. The first is consistent with what I have been arguing with regard to levels of remuneration in a company: the need for transparency. To cite the Association of British Insurers in its evidence to the BIS Select Committee in December 2011:

“We think that the heart of the problem lies in the serious conflict of interest inherent in an insolvency practitioner devising a pre-pack sale in secret in conjunction with the directors and secured lenders of a failing company, and then immediately implementing that transaction as administrator with a duty to act in the best interests of all creditors”.

The question that many small businesses find themselves asking after a pre-pack insolvency is: to whose benefit is this insolvency? They find that the answer is: those who drew up the insolvency plan and called in the administrator. It is there that the problem lies. When parties connected to the old company are involved in the new company, that compounds the frustration felt by unsecured creditors. The percentage of pre-packs which are sold to connected parties is higher than for business sale administrations.

There have also been some egregious abuses. My honourable friend Luciana Berger MP tabled a Private Member’s Bill in the other place to amend the Health and Safety Acts to prevent companies avoiding fines by being in administration. A construction worker, Mr Mark Thornton, had been killed by a steel column on a building site in my honourable friend’s constituency. A judge said that he was unable to award a £300,000 fine because the company was in administration. The company responsible was later bought out by its directors in a pre-pack deal and continues to trade. That shows at the extreme level the potential for abuse of pre-packs by connected parties. I am proud that the Labour Party has committed to fixing the health and safety loophole that allowed that and other such cases to happen.

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I acknowledge that there are strong arguments for pre-packs. To my mind, the strongest of those is the rate of job preservation. Figures from one study suggest that pre-packs preserve the entire workforce 92% of the time, as opposed to 65% of the time in other administrations. So clearly, they are not a bad thing. However, a few factors need to be considered alongside that. Pre-packs have a higher rate of failure than companies restructured in other ways. Another is that those jobs could continue in other companies. Also, the effect on jobs in small companies needs to be considered, as they could be vulnerable to losing out on large payments owed when a company goes into administration. By way of example, the Federation of Small Businesses has told me about a publishing company in London which had to lose a member of staff after it was not paid £100,000 owed to them by a company that went into pre-pack administration.

What possible solutions could the review consider? I know, for a start, that the Government are currently looking to strengthen and clarify the guidelines under SIP 16, which is the Insolvency Service guideline. I welcome that. However, what other safeguards could a review consider in detail? One that has been considered is that when an administrator has been advising a company about a pre-pack administration, before that pre-pack could be sold, an independent administrator would have to inspect the deal. It is true that that would add to the cost of the administration, but it would reassure creditors and remove what some argue is one of the clearest potential conflict of interest when pre-packs are put together: that of the administrator brought in by the management to organise a pre-pack insolvency.

That potential conflict of interest was recognised in 2010 by the judge in the case of Johnson Machine Tool Company Limited, when the court did not allow the administrator to charge his fees for pre-administration work on the pre-pack as an administration expense. That was because the people gaining from the work were not the management or the creditors—exactly what the critics of pre-packs argue.

Clearly, this is a difficult question, not least because there is no set definition of pre-pack in law. That very fact is a sign that some of its abuses were not envisaged by policymakers in the past and that we need a review to see whether improvements can be made and safeguards added. I beg to move.

Viscount Younger of Leckie: Noble Lords will be aware that the administration procedure is the primary mechanism for effecting business rescues. It is important to recognise that the objective of administration, if the rescue of the company is not feasible, is to provide the best return for creditors. A pre-pack sale is merely a means of achieving that outcome and should therefore always be in the interests of creditors. I am most grateful to the noble Lord, Lord Mitchell, for his helpful description of pre-packs for the benefit of the House.

As the noble Lord said, pre-packs can be an effective way to the best outcome for creditors, enabling businesses to be rescued and preserving jobs, but we recognise that there can be scope for abuse. That scope is greatest where pre-pack sales are to connected parties,

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such as the directors or their families. Again, I am grateful for the anecdotal evidence given tonight by the noble Lord, Lord Mitchell. That is when most concerns are expressed, and it is vital that everyone involved has confidence that such sales are at fair value. We have been listening carefully to concerns expressed about the use of pre-packs, and Ministers have met with stakeholders to discuss the issue. I am aware that, as the noble Lord, Lord Mitchell, mentioned this evening, he recently met with the Minister for Employment Relations and Business Affairs, Jo Swinson, to discuss the issue. We have also invited those who have complained about the procedure to provide evidence of abuse, so that that can also be pursued.

I reassure noble Lords that work is already under way to improve the transparency about pre-pack sales. There is a statement of insolvency practice, SIP 16, setting out the information that has to be provided to creditors by insolvency practitioners. That is being strengthened to ensure that more information will be disclosed and that creditors will receive that information at an earlier stage. Insolvency practitioners will also have to confirm that a pre-pack sale is in the best interests of creditors. That should provide greater confidence that the pre-pack sale is justified. The Insolvency Service is proactively monitoring information disclosed under SIP 16 reports to establish whether there has been any abuse. Where there is evidence to suggest abuse, it is reported to be relevant regulatory body for action to be taken. Such action can include fines, sanctions and, ultimately, loss of the insolvency practitioner’s licence. The Insolvency Service will report on its findings in this regard.

We therefore already have measures in place to protect against abuse, and continue to monitor the pre-pack process to ensure that it is being used appropriately. However, I share many of the concerns raised by the noble Lord, Lord Mitchell, which I know have been expressed on other occasions in both this House and the other place.

I agree that an independent review into the issue would be beneficial. For that reason, I confirm that we will commission an independent review into pre-pack sales in late spring, once the strengthened SIP 16 is in place and after the Insolvency Service has reported on the findings from its monitoring.

On the review issue surrounding continuation of supply to insolvent businesses, this is now the subject of a Government amendment being debated shortly. We propose to consult on the issue prior to implementing reforms and I am satisfied that this will address the concerns in this area. In view of this assurance to commission an independent review into pre-pack sales, I hope that the noble Lord will agree that it would be unnecessary to introduce a statutory requirement to do so, and will therefore withdraw his amendment. I conclude by thanking the noble Lord, Lord Mitchell, for raising this important issue.

Lord Mitchell: My Lords, I thank the Minister for his words. I remember when we were in Grand Committee, he too had an anecdote on this same subject. I suspect that many other people have as well. I thank him for

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what he has said and for the Government’s plans for a review of this area. I beg leave to withdraw the amendment.

Amendment 84AHNZA withdrawn.

Clause 75: Supply of customer data

Amendment 84AHNA

Moved by Lord Stevenson of Balmacara

84AHNA: Clause 75, page 75, line 15, at end insert—

“( ) Regulations under subsection (1)—

(a) must make provision requiring all regulated persons to be members of an approved redress scheme for dealing with complaints in connection with the supply of customer data under this section, and

(b) may also require a person authorised to receive data under subsection (1)(b) to be a member of such a scheme.”

Lord Stevenson of Balmacara: In moving this amendment, I apologise that my noble friend Lady Hayter is unable to be present and has asked me to speak on her behalf. I will also speak to Amendments 84AHNB, 84AHNC and 84AHND. I start by making it clear that we on this side support the broad thrust and intent of Midata, which is to give consumers increased access to their personal data in a portable, electronic format so that they can use this data to gain insights into their own behaviour, and make more informed choices about products and services. However, to make Midata work and to build consumer confidence in it, there are concerns which we raised in Committee and which our amendments seek to address.

Confidence is key, here as in many other places, and a smart way to ensure that users can trust the use and care of their data is through a redress scheme. Not only does this give comfort in itself—people know where to go if they have a complaint about the provision, cost or use of their data—but it serves two other functions. One is that any regulated person using the logo of a particular redress scheme also signifies some assurance of quality and regulation to the user. The second, more significant function, is that a body of evidence accrues via such a complaints scheme of the sorts of problems or the particular regulated persons which are causing concerns. Given that the Information Commissioner uses a risk-and-evidence-based approach to his work, he is highly reliant on evidence—both of the extent and detriment of any problems—and these are best captured by an accessible and effective complaint or ombudsman scheme.

I start with Amendment 84AHNA, which would require regulated and possibly authorised persons to join a redress scheme. This would not entail setting up a whole new redress body, as there are plenty of other high-quality ombudsmen covering a range of sectors who could be approved under this Bill. Without our amendment, the Bill covers high-level enforcement, but with customers able to bring an action for breach of regulations only before a court or tribunal or, under Section 13 of the Data Protection Act, to claim compensation through the courts. That is a pretty

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unrealistic hurdle for individual consumers. Hence our call for a redress scheme for individual complaints. Knowing a redress scheme is available if things go wrong would give consumers the confidence to harness the empowering potential of Midata.

Amendment 84AHNB deals with the costs of complying with requests. At present, the charges reflect costs to the data supplier. Our amendment is about costs to consumers: after all it is their personal data that they want released. Charges must not dissuade consumers from engaging in the Midata programme. The EU data protection directive uses the phrase “without excessive ... expense”, but given that not everyone is familiar with that directive, it should be added to the Bill.

Amendment 84AHNC deals with strengthened consumer protections. There are risks from Midata, especially as combining datasets into a whole-person view poses risks to privacy and identity. Secondly, because Midata will see multiple parties including the consumer assume responsibility for data at different points, liability becomes complex, with the risk that consumers will be left exposed. Thirdly, legitimate businesses offering third-party services could incentivise consumers to provide data which might otherwise not be accessible.

Fourthly, there is the risk of misuse of data. Businesses and third parties might, for example, sell on and share data with their affiliates or engage in uninvited cross-selling and marketing. Finally and pervasively, there is security. ID fraud is a real risk as it would be easy to build a picture of an individual, drawing on different information sources. Given that data protection is already of huge concern for consumers, an assurance of security is essential for Midata to succeed and benefit consumers, who will need to be confident they are sharing their data only with trustworthy service providers. We ask the Secretary of State to consult widely to develop protections to ensure that the consumer interest is represented alongside those of regulated and authorised persons. We know that the Information Commissioner would welcome being included on this list.

7.45 pm

Amendment 84AHND seeks to protect customer data. This arises from specific concerns that the Bill does not reflect the security risks inherent in providing third parties with access to customers’ banking details. The aim of Midata is to help consumers to effectively shop around by greater access to charges and fees on services provided, in this case, by a bank. However information in bank and credit card statements already reveals a vast amount of personal information, far beyond the data from mobile phones or energy providers. While customers might be able to use such data to make informed decisions, there could be data protection risks to consumers if they provide such information to third parties. Our proposals therefore seek to strengthen third-party arrangements to ensure customer data will be protected. Banks are bound by the common law duty of bankers’ confidentiality, which extends to all information relating to customers, their accounts and transactions with the bank, and by the Data Protection Act. However, if customers engage a third party to

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analyse their data, these contractual arrangements alleviate the data protection issues for banks. This means that customers would be relying on the quality of the third party’s security protocols.

Such third parties who seek to process customer data released under Midata should therefore be subject to increased regulation. Under Section 41A of the Data Protection Act, our amendment would extend the enhanced regime of inspection and enforcement by the Information Commissioner’s Office to third parties who receive customer data. While the Government already have the powers to make this change, this amendment would ensure they exercise these powers. I beg to move.

Viscount Younger of Leckie: My Lords, as I explained in Grand Committee, the idea behind the powers and Midata is simple: to give consumers the right to request their existing consumption and transaction data back from their suppliers in a portable, electronic format. I remind the House that are data already exist. We are not talking about collecting new data here.

In addressing Amendment 84AHNA, I reassure the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson, who is speaking to this amendment, that I agree with them both that customers need to be protected from data misuse. Service providers under Midata must comply with all existing data security and protection rules. There are well-established complaint and redress schemes through the Information Commissioner’s Office in the core sectors where ombudsmen already operate. Data controllers must notify the Information Commissioner of data processing under Section 17 of that Act. Failure to do so is an offence.

However, there may be a need for further measures. This is why a consumer protection and trust work stream has been established under the Midata programme. A number of working groups made up of privacy experts, business, regulators and consumer groups are looking at a wide range of consumer issues. They have been tasked with identifying and recommending existing best practices and, where appropriate, new approaches that may be needed to ensure the security of individuals’ data. The groups are due to report in summer and any recommendations that they propose may need to be reflected in enforcement provisions made under these powers.

The role of third parties is important. Where citizens choose to provide data to a third party, or provide authorisation for a third party to request data on their behalf, the Data Protection Act applies. Under that Act, data controllers do not need to comply with a request for data unless they are satisfied that the requesting party has authority to access it. The consumer protection and trust working groups are looking at a wide range of issues that could emerge in a new Midata world and the Government will want to take their advice before acting. Their recommendations might include kitemarks, accreditation processes and complaint handling and redress schemes, as well as other proposals. The Government do not want to pre-empt any recommendations by setting out detailed protection measures in the Bill.

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Turning to Amendment 84AHNB, I reassure noble Lords that the aim of our provision is to make data more accessible. We believe that Clause 75(5)(b)(ii) will have much the same effect as the limitation put forward by the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson. The Government expect data to be provided back to consumers cheaply, and ideally for free, but businesses may initially incur additional costs in making data available electronically and the power allows businesses to charge to recoup their only cost. Noble Lords may be reassured to know that data that have been so far released under the Midata voluntary programme have been provided to customers free of charge.

On Amendment 84AHNC, I would like to deal with proposed new subsection (6A)(a) first. As I have said, businesses do not need to comply with a request for data unless they are satisfied that there is a valid claim of access under the DPA. Mechanisms that might enable this are being considered in the working groups, so this is still a matter under consideration. However, it is clear from our discussions with data controllers that they will not be willing to release data to third parties unless fully satisfied that it represents a legitimate request from an authorised party. The methodology may vary by sector but the additional measures proposed in this amendment do not appear necessary at this time.

In her proposed new subsection (6A)(b), the noble Baroness, Lady Hayter, has raised an interesting point but the Data Protection Act already affords protections in this area. I recognise the concerns in this respect, particularly around the possible actions of nefarious or rogue operators. However, access to Midata would not alter the current data protection law and any criminal activity could be dealt with appropriately, as it is now. In relation to proposed new subsection (6B), we are working with privacy experts, businesses, regulators and consumer groups in the working groups that I have mentioned. Legislation would be introduced only after a period of public consultation. Scope will exist in any regulations to place conditions on accessing data by authorised persons. Therefore, I believe the specific provisions set out in the amendment to be unnecessary.

Finally, Amendment 84AHND would extend the Information Commissioner’s powers of compulsory entry and audit to the private sector for the first time. This is primarily a matter for the Ministry of Justice and I am not convinced that such a major departure from current policy can be justified here. Its most likely effect would be to stifle innovation. As a result, services that help people to analyse their data will not be developed or may be withdrawn. The ICO already has investigation powers to require information from the private sector; we believe that these are sufficient in this case.

I would like to come back to the noble Lord, Lord Stevenson, on his assertion about claiming compensation through the courts. I think he deemed that to be unrealistic, but the power does provide for a non-court redress route. This could include empowering the ICO to address Midata complaints, if that helps the noble Lord. In the light of my responses, I ask the noble

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Lord, Lord Stevenson, on behalf of the noble Baroness, Lady Hayter, to withdraw the amendment that she tabled.

Lord Stevenson of Balmacara: I thank the Minister very much for that full response. I am glad that he recognises the issues we raised. We are probably pulling in the same direction on this. In particular, the work streams to which he referred are obviously very helpful and seem to be widely inclusive. I am glad to hear that they will report in the summer, at the point where they can inform any regulatory steps that are to be taken in consequence of this Bill. I think we were very glad to see a couple of other points but I will read them in Hansard and come back if there are any further points we need to make.

My concern is that there were a couple of times in the Minister’s response where he made great play of the fact that he felt that the companies to which requests for access to data are being made would have sufficient ability to determine whether the request was bona fide and therefore to be relied on, without having to have any other cross-regulatory approvals. I hear what he says on that but would like to read it in Hansard to be sure that I am right on it. At this stage, I would say only that that sounds a slightly unlikely premise on which to run what will be a very large amount of personal data, if this works, and be very widely spread across a number of possible providers and users. In that sense, it will therefore raise all the sort of concerns that the public have about how their data are being kept and looked after. At this stage, I would not like to push the amendment any further and I would like to withdraw it.

Amendment 84AHNA withdrawn.

Amendments 84AHNB and 84AHNC not moved.

Clause 76 : Supply of customer data: enforcement

Amendment 84AHND not moved.

Clause 77 : Supply of customer data: supplemental

Amendment 84AHP

Moved by Viscount Younger of Leckie

84AHP: Clause 77, page 77, line 25, leave out subsections (3) and (4) and insert—

“(3) A statutory instrument containing (whether alone or with other provision)—

(a) regulations under section 75 which make provision by virtue of section 75(2)(d), or

(b) regulations under section 76,

may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.

(4) A statutory instrument which—

(a) contains regulations under section 75, and

(b) is not an instrument to which subsection (3) applies,

is subject to annulment in pursuance of a resolution of either House of Parliament.”

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Viscount Younger of Leckie: My Lords, I now turn in more detail to the Government’s own amendment in this area by addressing Amendment 84AHP. I am grateful to have received the advice of the Delegated Powers and Regulatory Reform Committee. Following that advice, I have put forward an amendment to Clause 77 so that any enforcement measures made under the power provided in Clause 76 would be subject to the affirmative resolution procedure. I have also made changes to allow provisions relating to core sectors under Clause 75 to be introduced using the affirmative resolution procedure. This would apply only when regulations under Clause 76 or those applying to non-core sectors are simultaneously proposed. I have undertaken this because there will be times when instruments tabled under both clauses will probably be necessary. Enabling the instruments to be considered together and using the same procedure—the affirmative procedure—ensures efficient use of parliamentary time.

Having these provisions in the Bill will help to progress the Midata programme and deliver economic benefits in terms of consumer empowerment and growth. We continue to seek progress on a voluntary basis. However, we are continuing to discuss the potential enforcement regime and appropriate levels of funding with the Information Commissioner and other relevant regulators so that should the power in the Bill prove necessary, we will be in a position to provide protection to consumers. We believe that the Government’s amendment strikes the right balance between providing the flexibility to tailor enforcement appropriately and ensuring adequate parliamentary scrutiny.

Amendment 84AHP agreed.

Amendment 84B

Moved by Viscount Younger of Leckie

84B: After Clause 77, insert the following new Clause—

“Power to add to supplies protected under Insolvency Act 1986

(1) The Secretary of State may by order amend section 233 of the Insolvency Act 1986 so as to add to the supplies mentioned in subsection (3) of that section any of the following—

(a) a supply of gas, electricity, water or communication services by a specified description of person;

(b) a supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.

(2) The Secretary of State may by order amend section 372 of that Act of 1986 so as to add to the supplies mentioned in subsection (4) of that section any of the following—

(a) a supply of gas, electricity, water or communication services by a specified description of person;

(b) a supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.

(3) The power to make an order under this section includes power to make incidental, supplementary, consequential, transitional or saving provision, including doing so by amending any enactment.

(4) An order under this section must be made by statutory instrument.

(5) A statutory instrument containing an order under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.

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(6) In this section—

“enactment” includes—

(a) an enactment contained in subordinate legislation (within the meaning of the Interpretation Act 1978),

(b) an enactment contained in, or in an instrument made under, an Act of the Scottish Parliament, and

(c) an enactment contained in, or in an instrument made under, a Measure or Act of the National Assembly for Wales; and

“specified” means specified in the order.”

Viscount Younger of Leckie: My Lords, these amendments respond to points raised by the noble Lord, Lord Stevenson, in Grand Committee. I am most grateful to him for raising this important issue. It is relevant to this Bill because it will help businesses, especially those needing to be rescued, and as such supports the Bill’s themes. The amendments contain powers that, when exercised, will assist businesses in insolvency procedures by increasing the chance of business rescue. Alternatively, where there is no chance of a rescue they may help to achieve a better return for creditors than would be delivered by an immediate liquidation or bankruptcy.

Amendments 84C to 84E contain powers to render void contractual terms that allow an essential supplier in the utility and IT sectors to withdraw supply from an insolvent business. These powers would also prevent suppliers in these sectors taking advantage of the insolvency by unfairly and unreasonably increasing charges for that supply. Some have described such demands as “ransom payments”, saying that where they are made, that supplier gains an unfair advantage over other creditors in the insolvency. They can act as a barrier to rescue and may force businesses to close down, causing unnecessary job losses.

Amendment 84B provides an enabling power relating to IT suppliers and those that provide or sell gas, electricity, water or communication services that are essential to business. By communication services, we mean services such as telephone, fax or broadband access that may be provided to a business. The amendment would add such supplies to an existing list of essential suppliers who must continue to supply and who may not demand payment of a pre-insolvency debt as a condition of that supply. They may, however, seek a personal guarantee from the insolvency practitioner as a condition of continuing to supply the insolvent business.

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The Government recognise that some of these proposals would affect contractual rights. For this reason the provisions are restricted to supplies that are essential to today’s business and which typically cannot be sourced quickly from alternative suppliers. They will not impact upon ordinary trade supplies. Further, this power is only exercisable in relation to procedures where there is still some chance of business rescue, that is to say administration and voluntary arrangements. There are also several safeguards provided for affected suppliers to ensure that the supplier is paid, including the right to require a personal guarantee from the insolvency practitioner for the post-insolvency supply.

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The powers allow for exceptions to be made to this right to request a personal guarantee. The 16th report of the Delegated Powers and Regulatory Reform Committee noted that the provision to make exceptions is widely drawn and asked for further information as to the circumstances in which this provision might be used. We will consult on any use of these powers, and we require the flexibility provided by this power to address issues that might be flagged during consultation. Situations where it would be appropriate to restrict the right to obtain a personal guarantee might include, for example, where no point would be served in requiring a personal guarantee. One example of this is if the third party had already guaranteed payment.

The remaining amendments in this group deal with extent and commencement. The UK’s insolvency regime is highly regarded internationally as one that delivers quick and effective business rescue mechanisms. The Government continue to seek to improve these mechanisms. These powers provide scope to give insolvency professionals the tools they need to rescue viable businesses, while giving adequate protection to those that will be impacted. I am grateful to the noble Lord, Lord Stevenson, for raising this important issue. I am aware that the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson, may wish to speak about these amendments. I will respond to their amendments after they have spoken. I beg to move Amendment 84B.

Amendment 84BA (to Amendment 84B)

Moved by Lord Stevenson of Balmacara

84BA: After Clause 77, line 4, after first “to” insert—

“( ) omit subsection (2)(a), and”

Lord Stevenson of Balmacara: I start by warmly welcoming the amendments tabled by the Minister, which respond in a very positive fashion to the amendment that I moved in Committee. I had no idea I was being so persuasive. That was a trick I should learn in other places. I clearly have something that I did not know I had. The points that the noble Viscount went on to make are also well taken. Even so, there are a couple of things that we would like to suggest are also taken into account.

For the reasons outlined, the necessity of IT equipment to the continuity of a business in difficulty cannot be overstated. Frankly, without this, there is no chance of any continuation, or of selling on, and thus of maintaining economic activity and jobs. IT is today as central as supplies of water and utilities. Therefore we also welcome the Government’s amendments to add on-sellers of utilities to the list of supplies that must continue. Given our desire to enhance business rescue, especially in these difficult times when banks are less than helpful, this change to prevent certain suppliers withdrawing services to struggling businesses is a significant step forward. We are delighted that the Government heard this plea.

The one area that we wish to raise, covered in the amendments that have been tabled, is the new mandatory requirement for a personal guarantee from the office holder—the insolvency practitioner—to cover essential

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supplies. Subsection (3) of government Amendment 84C permits the supplier to terminate the supply unless an insolvency office holder personally guarantees any charges arising from the continuation of the supply. This is a move away from the current legislation, which provides for an optional personal guarantee.

Although Section 233 of the 1986 Insolvency Act contains an optional guarantee in subsection (2)(a), when the Bank of England, FSA and HMT introduced equivalent provisions to protect financial institutions, this optional guarantee provision was removed, and there are now no provisions for such personal guarantees. This position for financial institutions is right, as we see no case for a personal guarantee from an office holder, since an insolvency practitioner should not be subject to personal liability when acting as the agent for the company.

Contrast the situation affecting directors, who are not mandatorily subject to such personal liability even though they have a similar relationship to their company. Such a requirement for a personal guarantee appears particularly inappropriate in respect of certain types of insolvency, such as for a supervisor in a voluntary arrangement who has no control over the business. The mandatory guarantee requirement in the government amendment is therefore a backwards step, and our amendments are to align the provisions with the recent regime for financial institutions, by removing the requirements for mandatory personal guarantees from office holders.

Our first two amendments also take this opportunity to amend the 1986 Insolvency Act to remove the optional guarantee from Section 233(2)(a) so that the provisions for essential services in the 1986 Act are brought into line with the protection regime for financial institutions. It is hard to understand the requirement for a personal guarantee, as there is no reason why insolvency practitioners should be subjected to personal liability when acting as the agent of the company. There is a real danger that such a requirement would reduce use of this tool with a real threat, therefore, to business rescue.

The existence of a mandatory personal guarantee would be particularly detrimental in CVAs where the management retains control of the business with the insolvency practitioner acting as supervisor. Given the limited control insolvency practitioners have over the business, with no control over the assets, they would be exposing themselves to significant risk by providing a personal guarantee. It is very unlikely that any insolvency practitioner would, in fact, go down this route. I should add that the proposed 28-day maximum credit period in subsections (2)(c) and (3)(c) of the new clauses is a reasonable compromise. Thus the demand for an additional personal guarantee seems excessive. We know the Government share our desire to maximise company rescues—often with the role of an insolvency practitioner as key. We trust they will not undermine their otherwise welcome amendments by the introduction of this counterproductive measure. I beg to move.

Viscount Younger of Leckie: My Lords, these amendments seek to amend the powers being introduced by the government amendments, to remove an important

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protection for suppliers. That protection is provided in the Government’s amendment by allowing suppliers to require a personal guarantee from an insolvency practitioner where they are prevented from exercising a contractual right to terminate supply. Not only does the amendment put forward by the noble Lord remove the protection provided by the government amendment, it also seeks to take away the right of a supplier to a personal guarantee in situations where it already exists in legislation.

I should make clear that essential suppliers who may be required to supply the insolvent business are very likely to be owed money within the insolvency. They are most unlikely to be repaid any more than a small proportion of that claim through realisations within the insolvency. Therefore the Government think it is only right that where such suppliers are obliged to continue supplying the insolvent business, they do so knowing that they will be paid.

The new powers do include other safeguards for the supplier, but none of these guarantees payment of the post-insolvency charges. We do not expect that a supplier will always require a personal guarantee, but we do think that, as is the case as the legislation currently stands, they should be entitled to one where they feel it necessary. It should be noted that the right to request a personal guarantee from the insolvency practitioner is a protection that utility providers have had since 1986, where they are requested to continue supplying the insolvent business.

Removing this right at a time when we are extending the requirement to provide supplies may send the wrong message. However, noble Lords will be aware that the powers do contain the ability to provide for exceptions to the right to request a personal guarantee. While it is anticipated that this would only be exercised in certain limited circumstances, it does provide for some flexibility in the matter.

There is a balance to be struck here. The powers provided by the government amendments will prevent essential IT and utility providers making ransom demands upon insolvency professionals. This can only help the chances of insolvency practitioners being able to rescue struggling businesses. However, they do interrupt normal contractual rights and, as such, we believe it is right to provide safeguards, of which the right to a personal guarantee is one of the most important.

I thank the noble Lord, Lord Stevenson, for his contribution. I am grateful for his comments and reassure the House that the Government take these issues very seriously. The government amendments demonstrate that the Government are committed to seeking improvements to the insolvency regime where there are clear reasons for doing so. However, the Government consider that the amendments suggested by the noble Lord would unfairly remove necessary protections for suppliers. I therefore hope that the noble Lord will agree to withdraw his amendment.

Lord Stevenson of Balmacara: My Lords, I agree that the Government are making good steps in this area. I do not want to in any sense take away from them the change that they are introducing through their substantive amendment. I agree that the insolvency

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processes in the UK generally are very good. They may be slightly better in Scotland, which is moving ahead with another Bill, and I hope that the lessons that Scotland is going to teach us are learnt in the processes in England and Wales.