| Previous Section | Home Page |
Column 645
"Andrew Large, the SIB chairman, said :The fact that such a massive fraud could be carried out reflects badly on the United Kingdom corporate financial system as a whole, as well as on a number of institutions and individuals within that system.' "
In other words, it reflected on a set of what I would call financial spivs. We have to make sure that such cases are not repeated. The only place that it can be done is Parliament. I do not believe that self-regulation can work when people are dealing with hundreds of millions of pounds of other people's money.
To conclude my remarks on this terrible scandal, we must call for a realistic grant from the Government. They are not faultless in the matter. They made arrangements for the Barlow Clowes victims. If anything, the Maxwell pensioners have a better case than the Barlow Clowes people had. It is not unreasonable to expect some compensation from IMRO. When I say compensation, I am not thinking about petty cash. It cannot give pensioners £2 million of £3 million and say, "That's your lot." We are talking about a massive fraud. We are talking about hundreds of millions of pounds. We should consider some form of penalty for IMRO for its incompetence and certainly its slackness in protecting the interests of the pensioners.
It will be years before ordinary working people regain confidence in pensions schemes--that is, if ever they do. What is more, I sincerely believe that the Government have some moral
responsibilities in the matter. We hope that the Minister will make a statement tonight which is worthy of being passed on to the unfortunate pensioners.
3.56 am
Mr. Paul Boateng (Brent, South) : I thank my hon. Friend the Member for Manchester, Blackley (Mr. Eastham) for initiating the debate. He has done his constituents--several of whom, as he said, are affected by the Maxwell scandal--and the House a considerable service in enabling us to respond to his debate. It comes on the day after the formal response by the Securities and Investments Board to the Investment Management Regulatory Organisation report ; so my hon. Friend's debate is in every way timely as well as welcome. I shall respond to several matters which arise from my hon. Friend's speech and relate that to the SIB response. It was clear from a reading of the SIB response to the IMRO report that at one stage the SIB considered withdrawing recognition of IMRO. It decided instead that IMRO
"should be retained based on appropriate strengthening". That strengthening is nowhere defined in the SIB's response. It would be helpful to know how it is proposed that IMRO should be strengthened, what role the Government intend to play in that and what action they propose to take.
My hon. Friend referred, and went straight to the point in so doing, to the position in which IMRO found itself. That position is criticised by the SIB. IMRO failed to have its ear to the ground to take note of what is described as "market talk" and should have been more sceptical about the information that was given to it. Had IMRO paid more attention to market talk, and been more sceptical, it might have been able to see what
Column 646
other people suspected about Robert Maxwell's operations--and what IMRO clearly neither saw nor suspected--and the extent of that massive fraud. The SIB said that it"views this with particular concern as the availability of such practical knowledge and alertness inside the regulators is a key feature of our"--
the United Kingdom's--
"regulatory system."
When that is not found to be available, it undermines that system. If the present system is to be retained, we must hear from the Government--and those who maintain that the system should be retained in more or less its present form--how we can ensure that its basis is not undermined as a result of IMRO's failures in the Maxwell case. The purpose of the present mix of statutory and self-regulation is contained and underpinned by the belief that IMRO, and the self-regulatory mechanism, is more desirable because it is closer to the market and is therefore more able to respond to what goes on in it. If, as would appear to be the case, that closeness is no guarantee of scepticism, or of being aware of the whisperings in the market and taking action accordingly, that calls into question the basis of the present regulatory system.
SIB goes on to say that IMRO's arrangements for granting admission to new members need "further scrutiny". Again, that begs the question : what form will that scrutiny take? What will happen when it is concluded, how long will it take, has it already started and when can Parliament expect to be advised of its outcome? So long as a question mark remains over the admission of new members, the very people to whom my hon. Friend referred-- those whom the regulatory system is primarily designed to protect, people who are not necessarily sophisticated and aware of the ins and outs of the market, but who are drawn into and affected by it--cannot be sure that the regulatory bodies admit new members on a basis that is satisfactory in terms of their bona fides and their providence, and their confidence in the system is undermined.
Another key matter, as the SIB points out, is that IMRO needs to strengthen its rules on the handling of private interests of board members. That is certainly so and was evident in aspects of the Maxwell scandal which, with good cause, gave rise to public concern. We believe that the SIB is in its own way as much to blame in this matter as IMRO. It was responsible for devising the principles of self-regulation, including the system whereby the self-regulatory organisations assess their own performance rather than subjecting themselves to outside examination. That is why my hon. Friend was absolutely right to link the SIB with the debate on the role of IMRO. They cannot be separated in this matter and both must bear a degree of culpability.
We have heard and read what the SIB says about the future of IMRO--we do not believe that it can survive. By postponing the inevitable, as the SIB does by its response, it does the system of regulation no service. We need to simplify the regulatory structure. We believe that we should have just one SRO for retail investment business and one to deal with the rest of the industry. In our view, that is the only way forward and the only way in which to ensure that confidence in the system is restored.
The Government must also address a number of other important issues. We would set them a number of tasks in
Column 647
relation to the regulation of businesses managing pension fund investments. There is no room for tardiness, no room for a wait-and-see approach. The public demand expedition in this matter and I am afraid that that has not always been apparent in the Government's approach. There has been complacency. We can only hope that the transfer of aspects of responsibility from the Department of Trade and Industry to the Treasury shows the Government's determination to get to grips with the issues.It is good to see the Economic Secretary to the Treasury in his place at seven minutes past 4 o'clock. I am used to seeing him at this time because of our time together in the Committee considering the Finance Bill. In fact, during that Committee stage, I saw more of the hon. Gentleman than I did my spouse--much to her chagrin. I look forward to hearing what he has to say.
We need to ensure that the responsibilities of all the regulatory authorities are clear, consistent and comprehensive. We need to provide for all investment business to be scrutinised adequately and continually, not only when such businesses are initially granted a licence. We need to lay down clear requirements for the other professionals involved, especially the auditors and the custodians of pension fund assets. There should be clear and regular reports to pension fund members.
My hon. Friend referred to some of his constituents who are Maxwell pensioners and who have suffered as a result of recent events. Those pension fund members are most immediately in our minds. The Government need to introduce a package that will be of immediate assistance to them. Compassion and the desire to preserve confidence in the regulatory system, the probity of our markets and the provision of financial services demand that. All those things demand action in support of the Maxwell pensioners. We look for some answers from the Government this morning and in the days to come.
4.9 am
The Economic Secretary to the Treasury (Mr. Anthony Nelson) : I have listened with great care to the comments of the hon. Members for Manchester, Blackley (Mr. Eastham) and for Brent, South (Mr. Boateng). I appreciate that both of them have raised the general but important issue of public confidence in occupational pensions, and they are right to request reassurance on this matter. I trust that what I shall say will reassure the constituents of the hon. Member for Blackley and the public generally about the probity of pension funds and the investment management thereof, and the supervisory arrangements for the management and administration of pension funds. Earlier today, my right hon. Friend the Chancellor of the Exchequer announced that the Securities and Investments Board had published the summary of conclusions and findings of IMRO's review of its regulation of Maxwell companies--including Bishopsgate Investment Management Ltd, and London and Bishopsgate International Investment Management plc. The SIB has also published its assessment of its own and IMRO's performance in this affair and the action that both the SIB and IMRO are taking to rectify the shortcomings identified. The SIB's assessment concludes
Column 648
that there were serious deficiencies in the supervision by IMRO of BIM and LBI. My right hon. Friend has placed a copy of the SIB's statement in the Library of the House.The Government have made it clear throughout that it might not be possible for the SIB to publish the review in full. We have been advised that publication of the full review by the SIB or the Government at the present time could be severely prejudicial to criminal proceedings. The summary of findings and conclusions which the SIB has published is the most that the SIB believes it safe to publish consistent with this advice.
It may be helpful to hon. Members if I explain some of the background to this review and why it was necessary to examine thoroughly the regulatory and supervisory aspects of the investment management of Maxwell pension funds. As soon as the extent of the problems became clear last December, the SIB began conducting with IMRO a detailed review of IMRO's exercise of its regulatory responsibilities for BIM and LBI. It was essential to ensure that the review was comprehensive and thorough. The review deals with serious issues and the SIB needed to consider the findings carefully in order to assess the discharge of its responsibilities under the Financial Services Act 1986. My right hon. Friend received the SIB's assessment of its own and IMRO's performance only a few days ago, and asked the SIB to clarify a number of further issues raised by the IMRO review. The conclusions have been announced just as soon as this work was completed.
The central conclusion of the review is that IMRO fell short of the high standards which it properly expected of itself. In its own words :
"IMRO's verdict on itself is not good enough'."
The review concludes that BIM and LBI were properly admitted to membership, and that IMRO's admission procedures were adequately thorough. At the same time, the review concluded that monitoring was applied over-literally and without adequate senior control and review, and that when "high risk" members were identified, this was not always followed through by adequate monitoring thereafter. IMRO also accepts there were lapses of judgment, inadequate alertness in picking up signs of possible trouble and failure to relate diverse pieces of information.
On the positive side, the review notes that IMRO's monitoring procedures have been reviewed over the past six months ; that IMRO has already put in hand some organisational changes and a modified system is being introduced to identify and focus resources on areas of higher risk. The review also notes that further re-examination is being undertaken and that IMRO will increase and strengthen the resources that it devotes to monitoring. In addition, the SIB has requested the IMRO board, as a matter of urgency, to produce proposals for strengthening its monitoring and other aspects, with which I will detail later.
The Government view the shortcomings identified in the SIB's assessment with serious concern and attach importance to the need for early action to ensure that the regulatory system is implemented more effectively.
However, neither regulator nor the system of regulation can guarantee that all fraud will be prevented or identified. The Maxwell affair was, as my right hon. Friend made clear in his statement, wholly exceptional--the vast majority of pension funds have served their members well. Furthermore, the IMRO review covers a relatively limited part of the Maxwell story. Under the Financial Services
Column 649
Act, IMRO's role in supervising pension funds was to regulate and authorise pension fund managers. IMRO was not, and is not, responsible for ensuring that pension fund trustees respect their wider obligations under trust law. Moreover, effective regulation must in the final analysis involve the active co-operation of the private sector, including the professional advisers, financial institutions and others, all of which have their ownresponsibilities.
IMRO's performance also raises questions about the SIB's monitoring of IMRO and its general oversight of the self-regulatory organisations under the Financial Services Act. Both those issues were raised by the hon. Member for Blackley. My right hon. Friend has therefore asked Mr. Andrew Large, the SIB's new chairman, to conduct his own review of how the SIB carries out its regulatory responsibilities.
My right hon. Friend has also discussed with the chairman of the SIB the need to strengthen the implementation in practice of regulatory standards. Mr. Large fully understands the urgency and importance of that task. My right hon. Friend has asked to be kept closely in touch with progress on the further work, reviews and improvements that are now in hand.
The SIB and IMRO are effecting a number of measures immediately. A number of changes in the senior personnel of IMRO are taking place. First, Mr. Charles Nunnely, the deputy chairman of Robert Fleming, will chair the board of IMRO until a permanent success to Mr. Nissen has been appointed, and IMRO will also be appointing a new chief executive. Secondly, IMRO has put in hand organisational changes and will strengthen its monitoring resources. Thirdly, IMRO has issued a consultation document on changes to its regime for occupational pension scheme managers. Fourthly, at SIB's behest, the IMRO board is producing, as a matter of urgency, proposals for strengthening the experience, skill and organisation of its monitoring staff, its arrangements for dealing promptly and effectively with potential and actual investor risk and its rules on board members' interests. For its part, the SIB wil review urgently IMRO's admission procedures and practices to ensure that its arrangements are satisfactory. It will also review IMRO's approach to monitoring its members, to ensure that the lessons of this particular case are applied generally.
Under its new chairman, Mr. Andrew Large, the SIB will re-examine the conduct of its own regulatory responsibilities and how to ensure that the lessons of Maxwell are taken into account in ensuring that all the regulators supervised by the SIB meet their responsibilities. In addition, the SIB intends to explore wider issues which fall within the responsibility of other regulators. Those issues include : a review of the supervision of the custody of investors assets ; a review with the SROs and the accountancy organisations of the relations between auditors and regulators, particularly the mechanisms by which auditors pass relevant information to the Financial Services Act regulators ; and arrangements to ensure effective communication between supervisory authorities.
It is to the credit of the SIB and IMRO that they have carried out this self-critical examination of their performance, published the findings for all to examine and presented positive proposals to improve regulation in future. [Interruption.]
Column 650
It is easy for the hon. Member for Brent, South to be somewhat derisive about that, but we would be the first to criticise bodies that presented a whitewash report of their part in any scandal or collapse. The fact that IMRO and the SIB have been self-critical and have pointed to the need for changes and improvements in some areas is to their credit. The House should be grateful for that. It is to be hoped that others in the private sector, including the professional advisers and financial institutions, will examine their own roles as thoroughly and openly.In this and earlier debates, hon. Members have asked whether the Government have responsibilities in this matter. First, it has been suggested that the DTI should not have granted LBI a principal's license under the Prevention of Fraud (Investments) Act 1958. The hon. Member for Blackley spoke about that. I shall give him the facts. The licence came into effect on 26 April 1988 and lapsed on 29 April 1988 when the Financial Services Act came into force. The directors were notified as Andrew Smith, Kevin Maxwell and Larry Trachtenberg. Robert Maxwell did not become a director of LBI until June 1988. The DTI did not license Bishopsgate Investment Management Ltd. The grounds for refusing a licence under the legislation then in force were, in fact, very limited. Unless there were previous convictions for fraud or dishonesty, or any other circumstances likely to lead to improper conduct of business, there was not sufficient reason for refusing a licence.
Under the Financial Services Act, however, IMRO was required to satisfy itself that the applicants were "fit and proper" to carry out an investment business and that they continued to be so. The fact that LBI was licensed briefly by the DTI did not in any way reduce the obligation of IMRO to conduct rigorous checks before admitting LBI to membership or to monitor LBI's performance.
In publishing the findings and conclusions of the IMRO review, the SIB has made it clear that IMRO complied with all its normal procedures in admitting LBI to membership and did not rest on the DTI licence.
The Leader of the Opposition has made several allegations that IMRO warned the Government that it could not do its job properly because of problems over the relationship between the Financial Services Act regime and trust law. This is quite wrong. In his statement, my right hon. Friend made it clear that he has looked into these allegations. Neither he nor the SIB has found any evidence to substantiate them. IMRO and the SIB made representations to the DTI over a number of years about the legal uncertainty which they believed was created by the interaction of the Financial Services Act and trust law. However, there was no suggestion that that uncertainty posed a threat to investor protection, and the SIB's conclusion is that neither the legal uncertainties created by the relationship between the Financial Services Act and trust law nor the existence of IMRO's special occupational pensions scheme regime made any material difference to IMRO's regulation of the Maxwell pension fund companies.
Much has been said about Professor Hayton's review. What it actually says is that pension fund regulation should be left to trust law. Following Professor Hayton's report, the DTI told IMRO and the SIB not to rely solely on trust law for regulating the management of occupational pensions schemes, and that it was for them to operate the system of regulation under the Financial Services Act to deliver adequate investor protection.
Column 651
Neither IMRO nor the SIB at any time advised the DTI that it disagreed with this advice or was unable to deliver the degree of investor protection required.Mr. Boateng : Is the Minister satisfied with the current state of trust law, on which the self-regulators are obliged to rely? If he is not, when and how does he propose to reform it?
Mr. Nelson : The Goode committee will consider such issues in its wider review. My right hon. Friend the Secretary of State for Social Security announced the establishment of the review, which will be thorough and wide-ranging. I am sure that it will examine carefully the question of trust law and the proper ambit of statutory law. I acknowledge the importance of these issues, and it is vital that they are considered carefully and that the House subsequently has an opportunity to examine any recommendations because they will have major implica-tions for the structure and liabilities of pension funds and their trustees. I hope that that satisfies the hon. Gentleman that the matter is continuing to be considered. It will, I am sure, be a central part of the Goode review.
It has been suggested that, in view of the shortcomings identified by the IMRO review, the Government should now pay compensation. The Government have made their position on compensation quite clear. Everyone sympathises with the hardship and uncertainty suffered by victims of fraud, but no Government can accept a duty to make good losses resulting from fraud or theft of savings. The taxpayer cannot guarantee to make good losses in such cases. My right hon. Friend the Secretary of State for Social Security has announced, however, a series of measures to help current and future pensioners, including emergency funding to underpin those Maxwell pensions at immediate risk.
Five positive measures are being taken to help current and future pensioners : first, emergency funding to underpin the Maxwell pensions at immediate risk is being made available by the Government ; secondly, since 8 June, a special unit working with trustees and others to secure the speedy return of assets and the rebuilding of funds has been set up ; thirdly, a trust is being established into which the private sector can pay voluntary contributions ; fourthly, as I said, a comprehensive review of the framework of pension law is under way ; and, finally, proposals have been announced on the introduction of employer debt provisions.
My right hon. Friend the Secretary of State for Social Security has made it clear that the priority must be to identify, locate and establish ownership of the stolen assets and to secure their return. The Government want to encourage and enable the financial institutions which have profited from Maxwell to assist the pensioners who have lost in this affair. Only those on the Opposition Front Bench seem to feel that this will be helped if the Government decide to make good some of the shortfall. There is no question of that.
It is clear that the chain of responsibilities had failings at many links, including trustees, banks, auditors, and investment advisers. The Government are doing all that they can to ensure that the assets of the Maxwell companies' pension funds are restored. We believe that all who have profited from Maxwell must meet their full responsibilities to help the Maxwell pensioners. Only those
Column 652
on Opposition Front Bench seem to think that this will be helped by the Government stepping in to offer compensation.Mr. Boateng : And the pensioners themselves.
Mr. Nelson : The position of the pensioners themselves varies. As has been said, some of them are being provided for by the acceptance of responsibility and continuation of payment of funds. Of course, for the time being, those pensioners are certainly content with that position. I acknowledge that there may be some uncertainty about what the future holds when a pension is not fully funded and is reliant on the commitment of the company involved. However, the Governnment have proposed a package of financial help and have instigated a review, which is as much as they can and should do in this instance. Such measures are to be warmly welcomed by contributors to and beneficiaries of pension funds at large and, in particular, by the Maxwell pensioners.
No doubt the Goode committee will consider whether a wider compensation scheme should be established for occupational pension schemes. In the meantime, the Government are not prepared to pre-empt the committee's discussions or anticipate its recommendations in any way.
I turn finally to the regulatory framework, to which the hon. Member for Brent, South referred in his closing remarks. Perhaps it will help some Opposition Members if I explain how it works. The Financial Services Act 1986 introduced a new framework for investor protection, including wide- ranging statutory powers and new criminal offences. Responsibility under the Act is shared between the Treasury, which is responsible for the Act as a whole, the Securities and Investments Board, to which responsibility for the discharge of statutory functions under the Act has been transferred as the designated agency, and the regulatory and practitioner bodies, including IMRO, which are recognised by the SIB to discharge its statutory functions.
IMRO is responsible for ensuring that, in carrying on investment business, its members meet standards of honesty, competence and solvency. It is the SIB's job to be satisfied that IMRO continues to meet the criteria for self -regulatory bodies under the Act. These include having adequate arrangements and resources for the effective monitoring of its members and for enforcement and compliance with its rules and procedures. The Treasury is responsible for ensuring that the SIB is able and willing, as the designated agency under the Act, to discharge the statutory functions which have been transferred to it.
I do not accept that the Maxwell case demonstrates that the supervisory structure itself is deficient. The failings identified by IMRO and the SIB are shortcomings of implementation. The integrity and success of other businesses authorised under the Financial Services Act show that the regime can and does work well. I acknowledge, however, that regulatory standards need to be strengthened. I have informed the House of the steps that are being taken by the SIB and IMRO, and the steps that my right hon. Friend will be taking to ensure that the operation of the regulatory system is sufficiently strengthened to deliver effective protection to investors.
I understand full well the concerns that the case has generated. My right hon. Friend the Chancellor stressed in his statement that he will be assessing the effectiveness of all the action already taken and proposed, together with
Column 653
the outcome of the SIB's further reviews. There are, of course, other issues which need to be examined, including the role of the other trustees of the Maxwell pension funds.The lessons will need to be carefully considered to ensure that the regulatory system is sufficiently strengthened to deliver effective protection to investors, including members of pension funds. The Government are determined that all the lessons of the Maxwell affair, in its many aspects, must be learnt and implemented. My right hon. Friend and I will assess in detail over the coming months the effectiveness of the steps already taken by the SIB and IMRO, the additional action now proposed and the outcome of the SIB's further review. My right hon. Friend has promised to report back to the House.
I have spoken at some length about the Maxwell case, the review and my right hon. Friend's statement. I have done so in response to the real concerns that have been raised by the hon. Member for Blackley and the general points that he and the hon. Member for Brent, South made about public confidence in the pension industry. I hope that what I have said provides them and a wider audience with some reassurance.
Column 654
Local Government Expenditure
4.33 am
Mr. David Wilshire (Spelthorne) : I am sure that you are well aware, Mr. Deputy Speaker, that Members who seek debates at this hour are probably either mad or feel strongly about a particular subject. In the next hour or so, I suspect that you will have the chance to decide which state of mind applies to me.
It seems that the subject needs an airing for the following reasons. Over the years, our debates about local government finance have led to repetitive legislation and repetitive failure. Every piece of legislation has resulted in continued lack of control. That has led to more legislation. The circle goes round and round. There are appalling relations between local government and central Government and a lack of affection for local government by the public. This adds up to a shaky future for local government. That is why the subject needs an airing, but why does it need one at 4.30 am, shortly before Parliament rises for the summer recess?
[Interruption.] There is a good answer to why 4.30 am--my luck ran out. If I had drawn a reasonable hour, others would have been mocked for turning up at 4.30 am and I could have gone to bed and slept soundly.
Whether at 4.30, 5.30 or 6.30 am, the issue certainly needs raising before the House rises for the summer recess. The Local Government Commission is about to embark on its review of structure and services and the Government are still examining accountability and local democracy. If those matters are being considered, finance must also be considered. They go together. One reason for the failure over the years to get local government reform right is that one minute we consider finance and the next we consider structure. Whether it is 4.30 am or not, there is a real urgency to make the point that finance needs to be considered alongside those other matters. There may be a temptation for people to say, "Ah yes, but we have done that. We are replacing the community charge with the council tax." However, the review of the community charge and the introduction of the council tax do not constitute a review of local government finance, just a review of one bit--that is, how to raise income. My argument is about the totality of local government finance, not simply the council tax. The Government need to go further than that.
If the totality of finance is not reviewed, the work of the Local Government Commission will ultimately fail and the future of local government will stay in doubt. If it is not done in the right order, finance will dominate. If all that we do is change to the council tax and say that that is the review of finance and all else follows from it, local government will continue to be dominated by finance as an end in itself, rather than the means that it should be.
If my argument is that the totality of finance needs reviewing now, why have I applied to have a debate on expenditure control in the early hours of the morning? It is because, in all the issues involved in local government finance, expenditure control is the key political issue which must be tackled first in any complete review of local government finance. Finance is a finite resource ; there is never sufficient money to go round, irrespective of the political ideology brought to bear on the problem. Yet politicians of all ideologies--my party is as bad as the others--find it desperately easy to pretend that finance is
Column 655
an infinite commodity. The result is that deficits, borrowings and so on are used to postpone the day of reckoning. Sooner or later, a total lack of realism develops, which leads to absurdities such as the lease and rent back of parking meters, and the whole issue of local government finance falls into further disrepute.Expenditure control is the key priority and action is urgently needed. Expenditure must be kept within the finances available, whether we like that or not. Until that is achieved, all other financial issues--including whether we have a council tax, rates, or whatever--are red herrings. However--this is the rub--in this day and age the public find it intolerable that all their needs cannot be met at once, which leads to politicians finding it almost impossible to grapple with the problems of expenditure control. That makes expenditure control a high-risk topic, but that is inevitable. Those who ask the Government to face up to it usually end up being unpopular, but I am resigned to that.
To obtain effective expenditure control in local government, we must first control total expenditure, and that is highly controversial. Secondly, we must control properly the allocation of all the funds involved ; that, too, is highly controversial. Thirdly, we must control and maximise the value obtained from the money that we spend. That should not be so controversial, but at the moment people seem to focus on that ; yet it is mainly a managerial issue. It has become controversial because politicians have homed in on it and interfered in what is primarily a management matter, ducking the first two issues.
Perhaps I may digress slightly to say how we should not seek to achieve expenditure control, and that is by fretting over income. Looking back through Hansard, one sees recent attempts at that. There were debates about whether rates are the right way in which to obtain effective control, and it will be seen that that led to the introduction of the community charge. One of the great arguments was that that would make it easier to control things because it would result in greater accountability. That was discovered not to work, so the argument was deployed that the council tax would be the right way forward.
All those debates are about income and the methods of income control which have come on the back of that. First, we had rate capping--the capping of income. That did not work. We then had charge capping--the capping of income. The history of the whole subject proves that the approach of trying to control expenditure via income is doomed to failure. Any attempt to control expenditure via income leads to ever more draconian and ever more silly attempts at expenditure control. That route must be abandoned. The bad news for the Government is that capping will not work. The only way to control local government expenditure effectively is by controlling expenditure itself. That is what politicians hate, but unfortunately they have no choice but to do it.
We should be clear about the Government's role in the process of expenditure control in local government. That, too, is a highly controversial matter. If there were others silly enough to be here at this time of the morning, they would be jumping up and down saying that any discussion of the Government's role is all about centralisation and the removal of local democracy. That point is inevitably made, but it is nonsense. That, too, is a red herring. There are two areas of expenditure control where the Government have a primary responsiblity about which we
Column 656
should be clear. The first is that, whether we like it or not, the Government have an on-going concern in all expenditure, simply because all expenditure affects the state of the economy, which means that the Government are bound to be involved. As all expenditure affects the state of the economy, that means that Government intervention in such matters is inevitable.Again, if there were people here on the Conservative side they would be jumping up and down saying that we believe in
non-intervention, but in a national economy even non-intervention has an effect on the economy. Therefore, non-intervention amounts to intervention. That particular circle will go round and round so that we end up concluding that, whether we like it or not, the Government have a role in all expenditure. We cannot get away from that. No amount of flag waving about local democracy can change that. The second reason why the Government have a role to play in local government expenditure control is the good old principle of he who pays the piper calls the tune. Central Government currently provide some 86 per cent. of local government's money, and it follows as day follows night that the provider of such a large proportion of income will, quite properly, want an enormous say in how the money is spent. For better or worse, central Government are involved.
What should we do to control local government expenditure? I believe that there are three requirements. First, we must be absolutely clear about the source of all the finance with which we are dealing. Secondly, we must be absolutely clear about the purpose of all expenditure. Thirdly, we must know on whose behalf the expenditure is taking place ; we must be absolutely clear about that, too.
The first requirement is fundamental, for a simple reason. Each source of money requires its own method of control. Central Government, for instance, can best control their own expenditure by simply saying no. In the case of spending by private citizens, however, it is not sensible for the Government to say no ; the best way of controlling private expenditure is the imposition of expenditure taxation.
One of the worst examples of categorisation by source of money is the category that we call local government expenditure--the subject of this debate. That is perhaps the best example of how not to do things. What we call local government expenditure has not one but two sources. The first is local money ; the second is central Government money. The local source can be further subdivided. Local money comes in the form of local taxation, fees, charges, interest on investments, borrowing, and so forth. Each of those many sources raises different issues in regard to control, and each is best controlled in a different way. In reality, local government expenditure--the label that we apply to all that money--is a pool of funds from a number of different sources, rather than a category in itself. That must be put right.
The second requirement for the proper control of expenditure is the clarification of its purpose. Currently, huge sums are allocated in a very general way, and apportioned to a particular purpose later. The result of that process is entirely predictable : it is acrimony. The recipient of the money does with it what he thinks right ; the provider, who has not got what he expected, objects--and rows break out. Hansard and the newspapers are littered with examples.
Column 657
Why are we in this mess? There are two reasons. First, central Government, the provider of so much of the money, are in fact a multi-agency conglomerate with lots of different Ministries, all making their own allocations. Secondly, local government is a mini- government in its own right, and there are lots of different people deciding what to do with the money when they receive it. Each Ministry, and each council, determines its own priorities, and switches resources around as it thinks fit. Friction and muddle are inevitable in that process, and things are made worse by using the wrong approaches to try to solve that muddle. At present, attempts are made to control expenditure via the type of allocation rather than via the purpose of the expenditure.For example, general allocations in local government are worked out using wondrous formulae. Allocations against bids, such as those for the housing improvement programme, are worked out in a general way. Allocations against bids for lumps of money or general allocations via grants are both incredibly easy to reallocate. If money is handed out in that way, we should not be surprised if it is not used for the purpose for which it was intended.
The other method is agency allocation. Motorway repair contracts are a good example of that. If money is allocated to repair the M3, it is incredibly difficult for the person who receives it to use it for any other purpose. It seems crystal clear, therefore, that we should allocate all money against specific purposes rather than shovelling it out in large sacks.
The third requirement that central Government must take on board is the need to clarify whether expenditure is being made to purchase a service or to provide a service. Those are fundamentally different functions. The test is to ask on whose behalf the expenditure is being made. Taking the fire service as an example, we must ask whether its expenditure is carried out on behalf of the Home Office or of local government. Confusion may arise, and some people may say that the money is spent on behalf of local government while others say that it is on behalf of the Home Office--but that is because many people fail to think through what local government really amounts to, and what it really does when it provides a specific service. Sometimes--as, I suggest, is true with the fire service--local government acts simply as a service delivery agent. The Home Office provides more than 85 per cent. of the money for the fire service and also sets the standard, so the Home Office is purchasing a service. On the other hand, when local government acts as a mini-government in its own right, it is free to decide what to do. It cannot be acting in that capacity with the fire service, because it is not free to abandon its fire service or to lower the standards. One has to think that conclusion through. If we give local authorities large amounts of general money and leave them to get on with it, they will always act as mini-governments.
For example, the standard spending assessment for my county of Surrey says that the authority needs to spend a certain amount on social services, so it is given an allocation of money to spent that amount. But Surrey spends £8 million less than its allocation on social services, with the result that my mailbag is full of complaints about the poor standards of social services--yet the county still receives that money.
Column 658
However, if we look on the process as one of purchasing services from local government, an authority is pinned down to acting as a contractor, not as a mini-government. Then one can control the expenditure if one provides the money, and can specify via a contract the standards that, as the provider of that money, one expects. Thus, effective expenditure control requires us to be absolutely clear when local government is acting as a contractor and when it is acting in its own right. That confusion must be sorted out.How can central Government improve their role in the control of local government expenditure? The thought process starts with a paradox : the current arrangements appear to be designed to weaken rather than to strengthen expenditure control. The source categories are wrong and there are huge, generalised allocations--both marvellous ways of weakening control rather than strengthening it. If central Government want to control local government finance effectively, they must reorganise provision, allocate all moneys to specific services, end the use of general formulae, and specify the basis on which funds are transferred to local government.
The first step is to reorganise the provision of finance. I said that central Government is a multi-agency arrangement. The process is that central Government gather in most of their money via one Ministry--the Treasury. Many separate Ministries then decide expenditure allocations, and the resources are then handed over to the Department of the Environment to pass on to local government. That is a wondrously effective recipe for ineffective control. All sorts of different people have a finger in the pie. I argue that every Ministry should pass on its own funds direct to those whom it chooses to provide services. That is bad news for my hon. Friend the Minister, and I am sorry--but the Department of the Environment should be involved in handing on only money for which it is responsible, rather than in passing on money via a general allocation in respect of services in which the Home Office or the Department of Education, for example, is involved. That fundamental change must be made as quickly as possible.
The second step is for central Government to allocate all their funds to specific services and to specify and clarify the categories of service to which moneys are being allocated. The problem is that we do not get those categories right either. The general formula used now includes many categories which do not represent whole services. If money is allocated to such categories, attempts to exercise control become fragmented--with the result that the public's needs are not met, services are duplicated, and there is a great deal of waste. That is a recipe for disaster.
If service categories are too big, other problems arise. Education provides a classic example. As a label for local government purposes, it covers a wide range of provision--including nursery services, primary schools, secondary schools, school lunches, clothing grants, and special help for the poor and handicapped. They are all separate services, and they each raise different issues of service provision and control. If progress is to be made, they all require a different approach and must not be lumped together.
Education is seen as an all-embracing term, but for a local government councillor, it does not encompass private schools or universities. Muddle comes out of that. Large categories also mean different things to different people.
Column 659
When councillors meet a Minister and say, "We want to talk about education," they mean schools, lunches, clothing grants, and special schools. However, the Minister in the Department of Education to whom they were speaking would not mean the same thing when he or she replied. The Minister would mean schools and universities, but the councillors would not be talking about universities. While listening to the councillors saying that it was very difficult to help the handicapped, the Minister would have no right to discuss that issue. Councillors would mean one set of services and the Minister would mean something else. That would be a dialogue between two people using different languages. Using too large categories can produce that kind of muddle and that must be sorted out.The Government must move away from using formulas which are the consequence of having too large categories and simply shovelling out large amounts of money. Because they do not work, they become ever more complex and silly. The best example of that at the moment is the fact that the allocations of all councils in England have been affected in the current year by the number of tourists in London. That cannot be sensible or a recipe for effective service delivery or financial control.
The Government must also specify the basis on which they are handing over the money. By that I mean that they have three choices : they can tell local government that they are handing the money over as a grant ; they can tell local government that they are lending the money and that they want it back at some stage in the future ; or they can say that they are paying local government to do something for them.
If one gives someone a grant or loan, one puts a huge distance between oneself and the person who receives the grant or loan. If that distance is established, it is almost impossible to control what happens after one has made the grant. If one makes a payment for something, however, one maintains that link. If one focuses on making payments and treating local government as a service delivery contractor, one will have maximum control of expenditure and maximum input into the standards received.
For example, if one makes a general grant to a local education authority, one has very little control over what happens in that LEA, but if one makes a payment to a grant-maintained school, one has a great deal of say in what happens in that school.
It follows that deciding who purchases each service is at the heart of getting effective expenditure control. However, local government seems to be obsessed with what it controls, even though it provides only 15 per cent. of the finance. In other words, it does not control what it thinks it controls, but only a very small part of it. That thought process must end. I believe that in future local government should control only what it actually purchases with its own money. It should not control what it purchases on behalf of central Government using central Government money. That amounts to a fundamental change in the role of local government.
We must be careful when we ask ourselves who should purchase what. My argument is that those who decide what needs will be met, and what standards should be achieved, should be the people who purchase the service. If we break that link and the person doing the purchasing does not decide the needs or standards, there will be an
| Next Section
| Home Page |