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Lord Sainsbury of Turville: I have two points of fact that are necessary for this discussion. First, POBA exists—at least, I am assured that it exists and have no reason to think otherwise. That is quite material to this discussion. Secondly, the powers that were in Section 46 of the Companies Act 1989 have never been delegated because of the complexities of that. That must be the starting point for this discussion.
Clause 3 enables the Secretary of State to delegate to a new or existing body her functions under Part 2 of the Companies Act 1989—that is, powers relating to the regulation of the audit. At present, Section 46 of the Companies Act 1989 enables the Secretary of State to delegate her functions under Part 2 of the Act. However, the functions can be delegated only to a body created, through the delegation order, for the purpose of exercising those functions. Clause 3 changes this, so that the functions may be delegated to an existing body.
The functions in question are primarily those of recognising supervisory bodies and qualifications for auditors. The Government's Review of the Regulatory
Regime of the Accountancy Profession recommended that the Secretary of State should delegate those functions to the body responsible for independent oversight of the self-regulatory activities of the major professional bodies. The review concluded that that would result in more effective oversight of the bodies.We envisage that the functions will be delegated to the Professional Oversight Board for Accountancy, or POBA, of the Financial Reporting Council. POBA is the successor to the Review Board of the old Accountancy Foundation, although its remit has been significantly changed. Its other functions will be to oversee the self-regulatory activities of the major professional accountancy bodies and the new Audit Inspection Unit that is being established to monitor major audit work.
The current delegation power in Section 46 has never been used. It was right for its time, but needs to be changed as there is a body already in existence which could carry out the Secretary of State's functions effectively. The change that we are proposing to the existing delegation power will enable decisions on the recognition of supervisory bodies and audit qualifications to be taken by a body that also has responsibility for oversight of the major accountancy bodies. I believe that the synergies that will be achieved will significantly improve the overall independence of the regime and the effectiveness of oversight of the supervisory bodies. That is part of a framework that we have put in place, which, without creating too heavy a superstructure, gives the independence that we are seeking.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister for that explanation, and for his reassurance that POBA exists. It was not clear to me from the conversations that we have had or from the Explanatory Notes that it had struggled into this world. That makes a difference to what we are discussing, and I am grateful for his explanation of the background to the clause and for the reassurance that he has given.
Clause 4 [Circumstances in which Secretary of State may delegate functions to existing body]:
Lord Hodgson of Astley Abbotts moved Amendment No. 13:
- Page 5, line 41, leave out "to be likely"
The noble Lord said: We now come to a group of amendments that relate to the delegation of functions to existing bodies. In moving Amendment No. 13, I shall speak also to Amendments Nos. 14, 15, 16 and 17. The amendments focus specifically on Clause 4; our concerns with this clause primarily focus on its drafting and whether it is drafted tightly enough.
Amendment No. 13 is designed to probe the drafting of subsection (2) of the new Section 46A. According to the Explanatory Notes, subsection (2),
- "provides that the body to whom the functions are to be delegated must be willing and able to exercise the functions and must meet certain other conditions set out in subsection (3)".
We accept and agree with that in principle. No delegation should take place to an existing body unless it is willing and able to carry out the functions delegated to it. However, we are not sure about the drafting in subsection (2)(b). This states,
- "that the body has arrangements in place relating to the exercise of those functions which are such as to be likely to ensure that the conditions in subsection (3) are met".
Our amendment would remove "to be likely". Arrangements should be in place which ensure that all conditions are met. To say that arrangements were "likely" to ensure that all conditions are met weakens the force of the argument. It raises the question of what criteria the Secretary of State is to use to make his or her judgment as to whether it appears that there are sufficient arrangements in the existing body which are likely to ensure that it can carry out additional requirements under subsection (3). That wording seems vague and ambiguous and does not add much to the drafting.
That links in with our objection to subsections (3)(b) and (4), which describe the further conditions as specified in subsection (2)(b). The Secretary of State must consider whether the existing body meets these conditions before he makes an order. We have no problem with subsection (3)(a)—that the functions to be delegated will be exercised effectively by the existing body. That is fundamental. However, subsections (3)(b) and (4) are ambiguous and unclear. They say that,
- "where the delegation order is to contain any requirements or other provisions specified under subsection (4), that those functions will be exercised in accordance with any such requirements or provisions",
- "delegation order may contain such requirements or other provisions relating to the exercise of the functions by the designated body as appear to the Secretary of State to be appropriate".
We would very much like to probe the Minister on those points because they are remarkably open-ended provisions. If the body is going to have to fulfil other requirements or provisions, we should know what these are or at least what they are likely to be. We need to be clear that under Clause 4 the right functions are being passed over to the appropriate body. We currently feel that subsection (4) goes some way beyond what is stated in the Explanatory Notes and provides a considerable degree of discretion to the Secretary of State as to how the provision is to be interpreted.
In a bid to try to limit the scope of subsection (4), we have tabled Amendment No. 16, which adds the words,
- "for the effective exercise by that body of those functions".
There is also some concern in the legal profession over a possible situation whereby the independence of the body might be compromised under subsection (5). As far as I am aware, the whole purpose of subsection (5) is to allow the body, POBA, to be involved in the independent monitoring subject to the arrangements made by the recognised supervisory bodies under Clauses 1 and 2, but also to take on the functions of the Secretary of State under Clause 4. The explanatory notes state:
- "The aim of this provision is to ensure that the POBA . . . is not precluded from exercising any delegated function on the basis of its involvement with the arrangements set out in clause 2".
I am unclear how that dual role will work. What will happen if there is a conflict of interest? How will POBA be able to exercise its role independently under Clauses 1 and 2? We believe that there should be a proviso that the independence of the body is not thereby compromised, especially in view of the fact that while currently the Government have POBA in mind, there might be other bodies in future which could find themselves in a different and difficult position.
This group of amendments is intended to probe the Minister so we can delve down into a few more details on the intricacies of the provisions and how they will work in practice. I hope, in that spirit, he will give us some clarification on the drafting of Clause 4 and what circumstances that it is designed to meet. I beg to move.
6.15 p.m.
Lord Sainsbury of Turville: This group of amendments deals with circumstances in which the Secretary of State may delegate her functions in relation to orders as to an existing body. The noble Lord, having attacked us for setting out these very detailed requirements for the board and having withdrawn that amendment, now has another amendment that says that the requirements are rather modest and that more requirements could be on the board. He can have it one way or the other; either the Secretary of State has responsibility to set some requirements down or she does not. We have a rather limited requirement here. Let me explain the thinking behind it.
The whole group of amendments deals with the circumstances under which the Secretary of State may delegate a function in relation to auditors to an existing body. As noble Lords will be aware, we expect to delegate those functions to POBA, the Professional Oversight Board for Accountancy, of the Financial Reporting Council.
Amendment No. 13 would adapt the existing proposed requirement so that it must appear to the Secretary of State that the arrangements which an existing body has in place as to how it will exercise the functions are such that the conditions in subsection (3) will be met—not just that they are likely to be met. As
noble Lords will agree, it is extremely important that if statutory functions are to be delegated to an existing non-statutory body, there are provisions in place to ensure that the body is suitable. However, I believe that the current formulation that the arrangements must be such as to be "likely to ensure" that the conditions are met is sufficient. Amendment No. 13 would require a degree of certainty that it is not reasonable to expect in these circumstances.Amendments Nos. 14 and 15 would remove the power of the Secretary of State to insert additional requirements into the delegation order. Alternatively, Amendment No. 16 would limit the requirements that can be inserted by the Secretary of State into the delegation order to those that are concerned with the effective exercise by the body of the functions. Bearing in mind that this provision applies only when the functions are to be transferred to a pre-existing body, we consider it prudent to enable the Secretary of State to specify additional requirements or provisions if, and only if, the need should arise. I should emphasise that the House will of course have the opportunity to debate any such provision when the delegation order comes before it for affirmative resolution.
I shall give an example of the kind of requirement that we have in mind. An example of a specific requirement or provision might be to ensure that, when reporting to the Secretary of State on the exercise of any delegated function, the body includes copies of the reports on audit regulation made to it by the recognised supervisory bodies.
I now turn to Amendment No. 17. As part of its responsibilities, POBA will oversee the new Audit Inspection Unit which will monitor the audits of listed companies and other public interest entities. POBA's sister boards within the FRC—the Accountancy Investigation and Discipline Board and the Auditing Practices Board—will also be responsible for running arrangements in which we expect that the recognised supervisory bodies will participate in order to meet the new recognition requirements introduced by Clause 1 of the Bill.
The purpose of subsection (5) is to ensure that the mere fact that POBA has a certain position in the FRC structure does not of itself prevent it from taking decisions on the matters which are delegated to it.
I do not consider that Amendment No. 17 is necessary. In order to exercise any delegated functions effectively, POBA would have to perform them independently of any link that it has with the standard setting, monitoring and disciplinary arrangements by virtue of its position in the FRC or its functions in that structure. If POBA were to take irrelevant considerations into account in exercising its delegated functions, that would be likely to adversely affect the effectiveness with which POBA could perform its functions, thus calling into question whether it could continue to be the designated body. An example of an
irrelevant consideration is whether the standard setting, monitoring or disciplinary arrangements are part of the same corporate structure as POBA.
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