New Clause 6 - Remuneration consultants

Financial Services (Banking Reform) Bill – in a Public Bill Committee am ar 16 Ebrill 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

‘The Secretary of State will by regulations provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant financial institution.’.—(Cathy Jamieson.)

Brought up, read the First time, and Question proposed (this day), That the clause be read a Second time.

Question again proposed.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

I remind the Committee that with this we are discussing the following:

New clause 7—Remuneration committee—

‘The Secretary of State will provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant financial institution.’.

New clause 10—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

We were talking about remuneration and how it contributed to the financial crisis. We were also talking about some of the principles that we should apply in future to ensure that remuneration does not contribute to instability.

Under the Financial Service Authority’s remuneration code, being taken forward under the Financial Conduct Authority, between 40% and 60% of bonuses need to be deferred and at least 50% must be paid in shares or other long-term instruments. That means that the up-front cash element of bonuses is now limited to between 20% and 30%. Bonuses, in any event, are down by 80% since 2007. From 1 October this year, a binding shareholder vote will be required on executive pay. Since the financial crisis, we have put in place measures that make the United Kingdom one of the more rigorous regimes in the world regarding remuneration policy.

New clause 6 would require shareholders to vote on remuneration consultants appointed to advise board remuneration committees. The Government consulted on such a proposal last November, but it attracted little support from shareholders. The feedback from the consultation is that that would introduce bureaucratic requirements without any particularly valuable benefit.

Shareholders who responded to the consultation said that greater transparency is needed regarding the appointment of consultants to advise remuneration committees. We will therefore amend the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 to require future remuneration reports for quoted companies to state: whether anyone has provided advice to the remuneration committee; if so, who; whether that person or body has provided any other services to the company; who appointed the group or individual; how they were selected; the cost of that advice; and the basis of payment.

We will lay regulations in the coming months and ensure that the provisions come into effect from October 2013. They will go further than we have done and give shareholders more information than ever before, without micro-managing their responsibilities. That is in the context that from October, there will be a new vote on the proposal for remuneration anyway. Our plan is consistent with the outcome of the consultation, and I hope that the hon. Member for Kilmarnock and Loudoun will find that it meets the spirit behind new clause 6.

New clause 7 would require companies to have an employee representative on remuneration committees. It is important that such committees make their decisions based on a wide variety of information. Companies and shareholders may, if they want to, have an employee representative, but at the moment they are not compelled to.

Our approach is not in any way to resist the idea that the opinions and experience of employees should be made available to boards and remuneration committees in making their recommendations; it is based on transparency. I have said that we will table amendments to the 2008 regulations on disclosure. Some further changes that we will make include requiring companies to disclose whether and how they have sought employees’ views on pay and to publish that in directors’ remuneration reports. They must say how they have taken into account the pay of existing employees in making pay decisions.

New clause 10 would require the Government to introduce proposals for incentives to take into account performance and stability over a five to 10-year period. Again, I think all of us would recognise and reflect on the fact that some of the very short-term rewards and bonuses contributed to excessive risk-taking in the last financial crisis, and that was in the interests of neither shareholders nor taxpayers. The Financial Services Authority’s remuneration code as it was drafted, now being taken forward by the Financial Conduct Authority, reflects the global Financial Stability Board’s principles for sound compensation practices. This requires variable remuneration for risk-takers to be deferred for at least three to five years, and to be subject to a retention period on vesting.

The difficulty with new clause 10 is that the period of deferral should clearly reflect the type of business that is subject to these provisions. For example, some funds come into existence and are wound up, and their business is completed in less than five years. In those circumstances, the correct alignment of incentives would be with the life of those funds.

In the case of other organisations and individuals, such as the directors of banks—ring-fenced banks, in particular—it is appropriate to consider career deferrals of bonuses, to reflect the long-term financial stability objectives. Some firms have gone beyond the minimum  specified in the remuneration code, reflecting the global Financial Stability Board’s principles. For example, HSBC has favoured deferral of bonuses until retirement in some cases. How the implementation of the code is being taken forward very much has this issue in mind. The minimum period is there to reflect the different circumstances, but already we see that people are making more informed choices as to how vesting takes place.

In the discussions that we have had around capital requirements directive IV in Europe, we have insisted that bail-inable debt should be part of variable pay. It seems to be a good and useful thing that if in future there is to be debt that can be bailed in, executives should be rewarded in that, so that their interests are again aligned with those of other stakeholders in the company. Of course, if the Parliamentary Commission on Banking Standards should come up with any further recommendations on pay, we will certainly consider them; we will have the opportunity to do so in this House and the other place.

I hope that the hon. Lady will feel that the additional measures that we are taking on remuneration address the substance of her concerns. At the moment, we have the most rigorous jurisdiction for pay in the world, but we want to go further and make it tougher. In particular, the implementation of both the code and CRD IV will give us the opportunity to keep this matter under review and to ensure that the problems of the past, when pay and remuneration structures actively contributed to financial instability, can never happen again.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

One of the things I have learned over my years in politics is that when there is a small victory over the Government, or a movement from them, it might be best to thank them for what they have done, make a quick point about where they have not gone far enough and then move on, lest I tempt the Minister to retreat in any way from what he has introduced, although I am sure that he would not.

My hon. Friend the Member for Nottingham East, who was not able to be with us for the full sitting of the Committee this morning and who would in other circumstances have been speaking about the new clauses, may well nudge me if I say too much and tempt fate in any way, because he has done a lot of the work in bringing this issue to a Committee, notwithstanding the fact that I have spoken about it this morning.

I want to make a couple of points briefly about new clause 6. We tabled it because we wanted to see greater transparency; we wanted to ensure that the shareholders were actively engaged. I heard what the Minister said about the consultation. I am pleased that, although he is not accepting the new clause, he will bring forward an amendment that will make a difference. I am sure that he listened to the consultation, in particular on issues about who was involved, what advice was given, who appointed them and so on.

We proposed new clause 7 because we believe it is important that employees should have the opportunity to be consulted and involved in the process. I would have liked to see the Minister go slightly further in ensuring that employees had representation on boards, but I am pleased to hear that he is at least not resistant to the idea. He seems to be open to the idea of employees’  opinions being taken on board. He referred to the importance of transparency and the opportunity to bring forward further changes that will require companies to state whether they have sought, and how they have sought, those views and to have that published. I would have liked to see more in that context, but I accept that movement has been indicated this afternoon.

New clause 10 addresses issues of short-termism. The Minister mentioned some difficulty with the technical aspects of the new clause’s potential to do what we hoped to see. I am interested to hear the Minister talk about the need on more occasions for a longer period of deferral depending on the type of business, and deferral of capture time. We would certainly not want a situation that precluded any of that happening if it were important.

If the Minister has not listened entirely to everything we have said during the debate, he seems to have listened further to us and partly to others on these critical clauses. I welcome that fact, although he has not gone as far as we would have liked. I am sure there will be opportunities for further debate. However, at this time I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.