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The Institute of Chartered Accountants has also raised with me the issue of gold-plating. This is not a new point for these regulations, but perpetuates the fact that the existing accounting regulations go beyond those required by EU law. It is often far from clear that, if there ever was a justification for the gold-plating, there continues to be one. The institute would like to see a commitment from BERR to review the accounting requirements of the Act and the regulations, to identify and, I hope, eliminate any excessive requirements. I assure the Minister that these Benches would give any order reducing gold-plating the warmest of welcomes.
The Government’s response to the consultation on the corporate governance directive was published in July last year. In that document, the Government noted that they would be having discussions with the standard setters to agree what action needs to be taken in respect of UK accounting standards or the changes implemented in these orders for related party disclosures and off-balance-sheet transactions. Will the Minister now say whether any actions are required on UK standards? Will they require additional disclosures? Does that have implications for the relationship between UK accounting standards and international ones? I am sure that the Minister will agree that it would be undesirable for this order to open up new gaps between UK accounting standards and international reporting standards.
Lastly, I shall come to the one aspect of these orders that is unnecessary. As the Minister said in his introductory remarks, in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, the Government have introduced an additional requirement for the remuneration report of listed companies to say how they have taken pay and employment conditions elsewhere in the group into account when setting directors’ pay. This issue was raised during in Committee during the passage of the Companies Bill in 2006. The noble Lord, Lord Lea of
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The new requirement in this order will add nothing to UK plc. It will add nothing of value to shareholders. It might satisfy the anti-corporate pay lobby which exists on the Government's Back Benches. I am afraid that it bears all the hallmarks of a concession made to the Labour Party's paymasters, the trade unions.
In fact, the particular issue is not of huge importance. Remuneration committees will devise some boilerplate wording to satisfy the new requirement. My concern is with the principle that the Government are legislating for some half-baked political reason rather than something which will help to create shareholder value. Whatever the new reporting requirement, the task of remuneration committees will still be to set pay for directors in a way that reflects market conditions for them and, more importantly, incentivises them to deliver profits and shareholder value. Of course remuneration committees keep an eye on the prevailing rates of increase for the workforce overall, but directors’ pay is driven primarily by the items that are not basic pay—bonuses, LTIPs, STIFs and so on—which are, in turn, dependent on business success. Anything that interferes in the hugely difficult process of creating an executive pay system which is based on rewarding success is at best a distraction. I end my remarks on these regulations on the unhappy note that the Government have, in this one respect, let themselves down.
Lord Shutt of Greetland: My Lords, I thank the Minister for telling us about the regulations. Interestingly, he reminded us about the lifting of thresholds and that the thresholds in the Companies Act 2006 are now lifted, and lifted quite seriously, in 2008. Yet he also referred to the thresholds for listing donations, whether political or charitable, and said that they were being lifted after 28 years. This gives one the opportunity to say that the Government are looking at thresholds in terms of regulatory reform and considering whether it should be someone’s job to look out across the field of government and decide whether they should be lifted. I was concerned, and still am concerned, about the threshold in the intestacy regulations, which has not been lifted for years. I asked a question in this House about this, and a committee has looked at it, but nothing has happened. Thresholds are important, and they should be part of regulatory reform.
I, too, am a chartered accountant and a member of the Institute of Chartered Accountants in England and Wales, to which I pay my subscription. I note from the documentation that it has sent us that it is “broadly content” with the regulations, although it has not had time to look at everything—dearie me, what about little me? The institute has a squad of people but has not had time. It tells us, however, that it is concerned about off-balance-sheet arrangements.
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My third point is that, as the Minister indicated, the documentation helpfully sets out in one place what has to be disclosed in accounts. Does he believe that it is the department’s job to set out a pro forma, or several pro formas or templates, of how this work should be done? That would be very helpful, but the Minister may say, “We’ll leave that to commercial sources”. If it is clear how accounts should be produced in accordance with the Act, it seems reasonable that a pro forma or template is produced.
I happened to spot in both sets of accounting regulations that if there were such a pro forma—or indeed if we look at the required formats—Regulation 7 for the small companies and Regulation 9 for the large companies state that you must not have a heading or sub-heading if there are no numbers on either side. You can have the heading if you had it the previous year, but otherwise you do not have a heading. I wonder how sinful it would be if, for example, you said in your accounts, “Land and buildings, nil; last year, nil; plant machinery, nil; last year, nil”. That does not seem too sinful. Indeed, it might be helpful because people think, “I am amazed that that company does not have any plant or any land and buildings”. I am surprised that it says that a company must not have a heading or sub-heading in those circumstances. It struck me as rather strange that that is so prescriptive.
5.30 pm
Lord Bach: My Lords, I am grateful to both noble Lords for their contributions, their brevity, and resisting the temptation for two chartered accountants to join forces against one criminal lawyer. It must have been very great for them, but they managed to resist and for that they deserve some congratulation. But I am more grateful for the general support given across the House to these regulations, particularly for the way in which the regulations are now set out under the new Act and for the raising of thresholds. I know that both noble Lords will be looking carefully to see how this works out in practice. Indeed, the noble Baroness asked whether, if in practice things do not work out as we hope they will, we will come back and make sure that they do. The answer is of course yes, although that will be subject to time and legislative ability. Everyone is in the business of trying to make these detailed and complex matters work for businesses and, I stress again, particularly for small concerns.
I was asked a number of questions which I shall see if I can answer. I turn first to off-balance-sheet arrangements. These are not defined in the directive, as the noble Lord, Lord Shutt, pointed out. We believe that it would be very difficult, if not impossible, to provide a watertight legal definition that covered all
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The noble Baroness was also concerned about accounting standards in relation to balance sheets, both UK and international standards. The standards are likely to have to keep changing in order to deal with off-balance-sheet arrangements, because those arrangements keep changing as the regulations change. We feel that it is best if the law remains at a principles-based level.
We understand what the noble Baroness is saying about gold-plating. The 2006 Act as a whole introduced a range of deregulatory measures that have been widely welcomed by business. Annual administrative burdens on business will be reduced by over £300 million. It is a huge task to implement the Act and the secondary legislation under it, and we have to get it right. In the mid-1990s the then Government carried out an extensive review of statutory accounting requirements and a number of changes were made to simplify them where the UK had gone beyond what was required by EU accounting directives. The European Commission is currently working on proposals to simplify company law requirements, in particular the accounting requirements for small and medium-sized businesses. As a country we have been actively involved with the Commission on the work it is doing. When the EU proposals have been finalised and the Government come to implement the changes, there will be an opportunity for us to look at the few remaining areas where the accounting requirements could be more closely aligned with the EU accounting directives. We think it makes more sense to look at accounting simplification as a package rather than take a piecemeal approach, and we hope very much that all interested parties will help in this by bringing forward suggestions.
The noble Baroness mentioned the new remuneration disclosure requirement and, in a gentle way, told us that she thought it was a bad thing. We think it is a proportionate response to the representations we received. Indeed, quoted companies should always apply the principles as part of the combined code. We are giving them the opportunity to look at how they do that over the next year so that they are ready to report on it when the requirement is implemented for financial years beginning on or after 6 April 2009. The noble Baroness said that she did not think this new disclosure requirement would cause industry a lot of trouble.
We believe that it is a good thing that directors receive bonuses on the basis of increased productivity. It is important also to look carefully at what kind of remuneration other members of the company are
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On templates, I hope the noble Lord, Lord Shutt, will be pleased to hear that Companies House is working on a standard template or format especially for small companies to make financial reporting easier for them. I hope that he and business will be pleased by what I am about to say. In general, figures that are zero will not be reported. This generally does not cause any problems at all. Companies House already allows electronic filing on a template for dormant company accounts and small company abbreviated accounts, so I do not think this is likely to be a large issue, if one at all.
The noble Lord referred to thresholds and said that someone should look at them across the board. We appreciate his concern. Thresholds arise from different places so it is difficult to take a common approach to them. Company law thresholds are determined by EU directives, as are these rises in the thresholds. The consequence, of course, will be that more companies fall into the small company bracket. That must be a good thing because it means that they will have less regulation to fulfil and should aid them in being successful companies.
I hope I have dealt with most if not all of the points so helpfully raised by noble Lords in this important statutory instrument debate. We believe that this is a business-friendly package of regulations and we are grateful for the support that it has around the House. It makes a small number of modest beneficial changes for companies.
On Question, Motion agreed to.
Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008
5.38 pm
Lord Bach: My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That draft regulations laid before the House on 17 December 2007 be approved. SixthReport from the Statutory Instruments Committee.—(Lord Bach.)
On Question, Motion agreed to.
Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008
Lord Bach: My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the draft regulations laid before the House on 17 December 2007 be approved. SixthReport from the Statutory Instruments Committee.—(Lord Bach.)
On Question, Motion agreed to.
- House adjourned at 5.39 pm.
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