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Dr. Howells: The hon. Gentleman's criticisms are well placed; he is a well-known deregulator. However, is he aware that the first set of regulations will be subject to the affirmative procedure and that affirmative resolutions will then apply to anything that we introduce immediately afterwards? That should be some defence.
Mr. Gibb: I am aware of that, but I am grateful to the Minister for bringing it to the attention of the House. However, affirmative secondary legislation is still a far cry from primary legislation. Many regulations in that pile of draft regulations amend primary legislation. I have great concern, shared by many Members of both Houses, about secondary legislation amending primary legislation.
That was not the Committee's main concern. Its main concern was that the draft regulations created offences punishable on summary conviction by a fine, but the way in which those instruments were drafted was wide enough to allow the regulations to provide for imprisonment or for trial on indictment. The Committee thought that the Government intended to use those powers only to provide for summary trial and fine, and wanted that limitation to appear on the face of the Bill. As Lord McIntosh admitted in the other place,
- it is our intention to apply to LLPs the same offences as apply to companies . . . In some cases these offences are triable on indictment and punishable with imprisonment.--[Official Report, House of Lords, 9 December 1999; Vol. 607, c. 1421.]
The over-use of delegated legislation is a serious matter, which should be of concern to all hon. Members. We shall seek to put it right, regardless of administrative inconvenience or precedent.
Our remaining concern over the drafting of the Bill relates to what have become known as the default provisions. The Minister also referred to them as such. Under clause 1, the whole body of partnership law is disapplied as regards llps except where it is explicitly provided for in the Bill. This is of concern because most of the firms that will want to convert to llp status will simply use their partnership agreement as the basis for the internal arrangements within the llp. The agreement may well be silent on a number of important issues, because well-established partnership law provides these details where they are not explicitly set out in the agreement. Small partnerships in particular will have relatively short agreements which may not include details such as the rules for the retirement of partners, the detailed rules about calling meetings or rules giving all parties the right to see the books and records. Those rights and rules are all there in general partnership law. To disapply that law may well cause difficulties for such smaller firms.
Dr. Howells: Presumably the hon. Gentleman is not arguing for over-prescription in terms of what a partnership should or should not be. One of the strengths of partnerships is the flexibility of arrangements. We are not seeking to take that away.
Mr. Gibb: I am grateful to the Minister for that intervention, but he misses the point. Our proposal in the other place was for a simple default provision where there were no provisions in an agreement about certain aspects of the partnership arrangement. When a crisis arose, those involved in a partnership could always fall back on those partnership laws that had evolved since 1890 through the courts and in statute. The Bill explicitly removes that default provision and could therefore give rise to difficulties. That is why in the other place my noble Friend Lady Buscombe proposed a provision that, for the avoidance of doubt, partnership law would apply if not otherwise excluded by the Bill. The Government rejected it on the grounds that, as the llp had a separate legal identity and would need primarily to adhere to the Companies Act rules, having a default to the partnership law rules might result in confusion and possible conflict.
Mr. Burnett: I agree with the central thrust of what the hon. Gentleman is saying. Does he agree that one of the great advantages of the Partnership Act 1890 is that not only has it stood the test of time, but a great deal of case law behind it is intelligible and easy to understand?
Mr. Gibb: The hon. Gentleman makes a very good point. We can never anticipate all the problems that will arise, but a hundred years of case law will probably have covered almost every likely contingency. We are rejecting that hundred years' experience in having clause 1(5) disapply all that body of partnership law.
We do not accept the Government's argument about why there should not be a default provision, because we are talking about the rules relating to the partnership agreement and the relationship between partners. The Law Society is also clear on that point. In its briefing for this debate, it states:
- The Law Society has always considered there to be the need for some default provisions that would operate in the absence of agreement to the contrary within a limited liability partnership and which would cover certain basic matters relating to the mutual rights and duties of the members of an LLP.
I would also be grateful if the Minister could address another important concern raised by the Law Society over whether the Administration of Justice Act 1960, as in force, will permit firms of solicitors to adopt the new form of incorporation. It understands that the Act will need to be amended, so I hope that the Minister will respond to that point.
This is now a much improved and useful Bill that will assist professional firms to recruit and retain top-quality staff and partners who otherwise might be put off by the prospect of perpetual unlimited liability arising from the negligence of others. It should also reduce the risk of such partners fleeing to non-UK jurisdictions. Subject to our remaining concerns, which we will address in Committee and about which I trust the Minister will be as reasonable as his colleague in the other place, we remain supportive of an important and useful Bill.
5.37 pm
Mr. Austin Mitchell (Great Grimsby): I tend to get suspicious when I hear bipartisan bleating about how wonderful a Bill is, although that is not why I wished to speak. I do not know whether we will have a tripartisan bleat from the Liberals, although they put in some good work in opposition to the Bill in the House of Lords. I hope that that might be followed up here.
The Bill is not the epoch-making measure that it has been portrayed as, by both my hon. Friend the Minister and the Opposition. It is a shabby measure. If not sordid, it is at least suspect, and it is interesting that the songs of praise for it have come largely--in fact, overwhelmingly--from the vested interests. It is regarded as a technical Bill, but it will have enormous repercussions that should be more widely discussed. Unfortunately, we cannot discuss them in an atmosphere in which everyone agrees that the Bill is wonderful.
The Bill will take the limited liability partnership--a device that began as a vehicle for tax evasion in Texas and Delaware, specifically to limit the tax obligations of partners in firms--and turn it into a new vehicle for corporate business. We do not know what the consequences of doing that will be. They could be substantial or they could be minimal. I fear that they will be more substantial than we think.
The change in company and partnership law is being done at the behest of the mighty and the greedy, and indeed the mighty greedy. The lobby for the Bill comes overwhelmingly from the big five--formerly big six, until they started eating each other--accountancy houses. The fee revenue of the big five was £4.5 billion in this country alone in 1999. That makes them powerful organisations, and I do not like the spectacle of the Government rushing to serve their purposes, their greed and their desire to
protect their profits, revenues and incomes as partners. I can understand the Conservatives doing that, because that was the whole process of Conservative Government for 18 years, and it is fitting that they began the Bill. I am more doubtful when a Labour Government pursue the measure. After all, Labour is a new and pristine party that will not make concessions to vested interests. We must ask why the Bill is being introduced--and especially why now?We know that the legislative timetable is packed. We know that there is a long queue of Bills. Discussions at the meeting of the parliamentary Labour party last week produced an enormous list of proposals from Labour Members for the legislative programme next year. These proposals included measures to deal with hunting with dogs; housing, including multiple occupancy; pensioners and carers, especially action on long-term care; the regulation of the private security industry; regulation and reform of park homes; equality and employment legislation; and consumer protection measures.
Those proposals are only a part of the list. There is an enormous list of socially responsible and sensible legislation that needs to be introduced, but we are told that that cannot happen because of pressures on the legislative timetable. However, one of those pressures is this sordid little Bill. Why is it being introduced, and why now?
It is a concession to a major vested interest, that of the big five accountancy houses. Unfortunately, it is not matched by any balancing changes to afford protection against any of the powers that are being given through the Bill. The Bill includes no protection for consumers of accounts--they are pretty weak or impotent when it comes to dealing with the big five or with unreasonable audits. Stakeholders in companies have very few rights to protect them from negligent auditors, but we are rushing to strengthen the position of those auditors. It is unreasonable to proceed in that way.
If we are to make such a concession to the big accountancy houses--we are giving them a special privilege--let us also give some privileges to the consumers of accounts, to stakeholders and to those who suffer from negligent auditors. We should reverse the Caparo judgment; we should impose a duty of care on auditors; and we should stop auditors taking on other business and thus introducing dilution. Company law imposes liability. Directors are responsible and liable if they publish false and misleading accounts. However, if an auditor publishes such accounts, there is no responsibility. Nevertheless the Bill will give auditors increased privileges.
The provisions that I have suggested could have been dealt with at the same time as the Bill. There is no reason for haste. That is why I have asked why the Bill is being dealt with so quickly. The Department of Trade and Industry company law review is continuing. It may propose some of the changes that I would like to see to redress the balance towards the consumer. Why not make these changes at the same time? That should be part of the deal.
If the big accountancy houses want to secure a special concession, in return they should make concessions to protect the consumer. However, they are not doing so, and we are handing them a concession on a plate. That is extremely unreasonable, especially for small shareholders, along with the stakeholders and employees who want to
know what is going on in their company and want honest, objective and effective audits. It is unreasonable similarly for those who rely on accounts to make investments. We are not giving those people any concessions while the vested interest is getting all that it wants. It seems that the consumers of accounts were not consulted in that process.What about Lord Paul and his experiences with the purchase of a Fidelity radio? He found that if he was to sue the auditors he had to buy the company and sue the directors, who then had to sue the auditors. That sort of experience gives me no faith in redress against auditors, yet auditing is a monopoly granted by the state to a particular class of people. Why are we giving them a concession when it is surely our job to regulate them?
The United Kingdom has public limited companies and 600,000 partnerships. Now, we are creating an intermediate breed, limited liability partnerships, which might even be called a corporate third way--although I do not think that such a development was envisaged in Professor Giddens's third way. This development could have severe consequences. Such partnerships could be established by fraudsters and by those who have been disqualified as company directors. We are diluting controls over those people, who could slough off their responsibilities.
I know that new Labour is nice to business, and that it is right that we should be nice to business. All sections of the community have to get on. We are not in a class war and we no longer feel basic antagonism towards business. I also know that the accountancy houses have been very nice to Labour. When we were in opposition, they gave employment to people who have subsequently become Ministers. They have organised conferences for us, provided advisers and advice, and even attended our fund-raising dinners. They have done us good service. I do not think that they did that with any view of a return such as the Bill--they are averse to such sordid motives--but they are not averse to getting this legislation.
The legislation's origins are very murky indeed. I should like to detail those origins because they are not based solely on a process of consideration, as we have been led to believe by the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) and Ministers. The fact is that the big accountancy houses got into a panic--which was well detailed by the hon. Gentleman--because, as they have deep pockets, they felt vulnerable. They were afraid that people would make huge claims against auditors. They were afraid that people were thinking, "If you cannot do anything else, you can make a claim against the auditors." However, the panic that possessed auditors bore no relation to reality. It also took no account of their own involvement in their own mistakes.
These days, the accountancy houses offer auditing services to the big public limited companies and essentially use those services as a market stall from which to sell other accountancy services. They get their foot in at the plcs by auditing them, and then use the audit service as the basis for selling other services to the company. That practice, however, dilutes the auditing process. Obviously, if they want to sell other services to the firm, they will be complacent in auditing. Audit problems in such situations are, therefore, of the auditors' own making.
There may be audit problems and dodgy companies, but who made the auditors take on those companies as clients? Who made them take on Maxwell? What force
was used to make auditors audit the Maxwell accounts or the Bank of Credit and Commerce International accounts? Auditors do not need to take on the accounts of dodgy companies. They should, therefore, face the consequences of dealing with such companies. The accountancy houses are in that position because of their own greed and their desire to maximise both fee income and the sale of other services to audit clients.The hon. Member for Bognor Regis and Littlehampton tried to hype up the houses' panic and alarm, but all the examples that he gave were from America. He could not produce any evidence of huge claims. The Select Committee on Trade and Industry also commented on the lack of evidence. Even the figures that have been mentioned are suspect, because they are the claim figures, not the settlement figures--which have not only been kept very quiet, but are very small indeed.
The hon. Gentleman also took no account of the fact that those who sue auditors usually come from other parts of the same big five accountancy house. Usually, the insolvency arm of an accountancy house sues to reclaim money from the audit arm at the same or another big five accountancy house. It is the worst type of incestuous suing. The terror that auditors have expressed is terror of themselves and of other parts of their own firm.
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