Guidance and government power

Regulatory guidance usually has little legal status, but sometimes legislation mandates it.

However, a recent UK Supreme Court decision [1] on ethical investments demonstrates that, when laws and policies are confused and agencies stray outside their lanes, even legislatively supported guidance has limits.

The Court ruled that local government pension schemes can divest from or boycott companies supporting Israel’s occupation of Palestinian territories, despite specific government guidance that pension funds should not pursue ethical investment policies contrary to UK foreign or defence policy.

Background

The BDS (Boycotts, Divestment, Sanctions) movement is a Palestinian-led campaign promoting various forms of boycotts against Israel in support of the political aspirations of Palestinian people. It is both widely supported (from extreme militants to humanitarians) and opposed (as anti-Semitic or counterproductive to Palestinian causes). As such, BDS is highly nuanced, controversial, political and hopelessly irreconcilable.

In 2016, the UK government amended regulations under the Public Service Pensions Act 2013 (UK). The new regulations concerned the prudential framework of the local government pension scheme, an omnibus scheme by which separate local authorities within England and Wales administer distinct funds to which both local employer and employee contributions are made. One of the main aims of the amended regulations was to decentralise investment decisions to the local authorities.

Various UK councils have long-adopted political positions in support of BDS. The substantive practical issue in the appeal was whether these councils could adopt ethical investment strategies for the funds under their effective control to advance BDS purposes. The question arose because the Secretary of State issued specific guidance under the scheme that pension funds should not pursue ethical investment policies contrary to UK foreign or defence policy, the UK being a strong supporter of Israel.

The case

The regulations required authorities to formulate a scheme investment strategy “which must be in accordance with guidance issued from time to time by the Secretary of State”.[2] The investment strategy “must include” (amongst other things) “the authority’s policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments.”[3]

After public consultation, the Secretary issued guidance which included that –

• “using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”; and
• “in formulating and maintaining their policy on social, environmental and corporate governance factors, an administering authority … should not pursue policies that are contrary to UK foreign policy or UK defence policy.”

The appellants, a company dedicated to campaigning in support of Palestinian causes and a member of its executive committee who also was employed by a local authority and was a member of its pension scheme, sought judicial review of the guidance.

Decision

In Padfield v Minister for Agriculture, Fisheries and Food,[4] the House of Lords held that an unfettered statutory power could only be exercised to “promote the policy and objects of the Act”.[5] The Padfield principle is consistent with Australian authorities[6] and is, in this country, enshrined as a formal ground of judicial review.[7]

The majority[8] held that the policy of the Act and the Regulations, on proper interpretation, was to identify procedures and strategy which administrators should adopt in the discharge of their functions.[9] Power to direct how administrators should approach the making of investment decisions by reference to non-financial considerations does not include power to direct (in this case for entirely extraneous reasons) what investments they should not make[10] which were choices to be made by the authorities, not central government.[11]

[The] Secretary of State has insinuated into the guidance something entirely different [to the policy of the Act]. It is an attempt to enforce the government’s foreign and defence policies.[12]

Accordingly, the Secretary of State’s inclusion of the two passages in the guidance exceeded his powers and was unlawful.

The minority[13] considered that the power to give guidance was not limited to procedural matters. The policy of the legislation was to establish suitable governance more generally. If the minister considered that it was in the public interest to restrict the investment decisions that the managers could take consistently with their duties to scheme members, this fell within the policy and objects of the legislation.[14]

Observations

Given the public interest in ethical investment decisions, the case received some media attention in the UK suggesting that local authority pension funds now had imprimatur to pursue broad ethical investment strategies. It should be evident that such observations misconstrue the import of the decision as any such strategies would need to remain within prudential boundaries.

Ultimately, the case (and the Secretary of State’s power) was determined on a question of interpretation of the purpose of the legislation.

Statutes rarely include “purpose” clauses and, even if they did, the clauses might not limit the proper interpretation. Legislative objects are usually multifarious and nuanced, particularly when the statute needs to be construed in circumstances not specifically contemplated at the time of enactment. The true purpose can only be divined from the wording and context.

It must be said that the pensions legislation in this case, on its face, appears to be prudentially focussed rather than value laden. To the extent that value choices are open, the legislation devolves them to the administering authorities. Although the Secretary of State had broad powers of guidance, their ambit was not unconstrained, as with any power of government. The Secretary may reasonably have determined that foreign and defence policy is a national concern and that local authority investment signals contrary to that policy may adversely reflect on government priorities, but in the absence of legislative scaffolding to support guidance to attach those priorities to prudential decisions, it is difficult to fault the majority view that the Secretary exceeded his powers.

Laws may be grounded in policy and policy may become law. But the only ways to enforce a policy are to transform the policy into law or enforce existing laws according to the policy, the latter being achievable only to the extent that the policy is not inconsistent with the legislation. It remains open to the UK government to legislate specifically to require local authorities to respect national foreign and defence policy in pensions investment decisions, but that is a separate political process to force into parliament a debate which it has not yet conducted.

Key takeaway

Guidance usually has little legal status. However, even when legislation expressly elevates its import and requires administrative guidance, it risks successful challenge when laws and policies are confused, and agencies push the limits of their legal remit.

Authored by:

Lionel Hogg, Partner